Paying taxes on tax-deferred retirement accounts

"Q: My wife has a 403(b) account. We have read that if we were to withdraw money to, say, pay off our mortgage, the government will tax the withdrawal. Is this true, and if so, why is there a tax on those funds, especially for seniors?

A: I get this question quite a bit.

People have saved for decades in tax-advantaged retirement plans such as a 401(k) or 403(b) looking forward to the time they can tap the money. But it’s a rude awakening when they realize the taxes that are owed. It seems unfair because what’s on paper is not what they will net.

But that’s the bargain you agreed to when you were allowed to invest pretax money into such plans. Eventually, the IRS will want its cut. This is also why there are required minimum distributions or RMDs.

“You cannot keep retirement funds in your account indefinitely,” the IRS reminds taxpayers.

If you don’t take any distributions, or if your RMD is not large enough, you may have to pay a 50 percent tax on the amount not withdrawn as required.

As the IRS explains it, your required minimum distribution is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your retirement plan account or IRA when you reach 72. It used to be 70 ½. Roth IRAs do not require withdrawals until after the death of the owner.

Here are the retirement accounts that fall under the RMD rules:

— Employer-sponsored retirement plans, including profit-sharing plans and 401(k), 403(b) and 457(b) plans.

— The Thrift Savings Plan (TSP), the federal government’s version of a 401(k).

— Roth 401(k). Even though you don’t have to pay income tax on the withdrawal, you still have to take an RMD. A Roth IRA does not require withdrawals until after the death of the owner.

— Traditional IRA.

— Simplified Employee Pension (SEP) and Savings Incentive Match Plans for Employees (SIMPLE).

But there are always exceptions and caveats in tax law. The IRS has an FAQ page if you need additional information.

So, yes, as frustrating as it may be, your withdrawals will be included in your taxable income."

Thanks to Michelle Singletary, author of "Color of Money" column in The Washington Post.