One of the Great Mysteries of Life—How Should Professors Access their TIAA-CREF Accounts after Retirement?
by James Lange, CPA, Attorney
Why do so many retired professors make such terrible decisions regarding their TIAA-CREF accounts at retirement?
Having worked with 650 professors for over 35 years, I submit a major contributing factor is professors don’t get the best information when they need it. A colleague, and/or an unfamiliar TIAA representative who happens to be on the other end of the phone, are not the best sources for thoroughly vetted information—especially when the stakes are so high.
Professors insist that their students engage in critical thinking based on reading qualified experts, preferably peer-reviewed authors, in their field. That is what I humbly suggest you do to make the best decisions for you and your family at retirement.
This article is a start.
The Mystery of TIAA/CREF
The great mystery of how professors should access their TIAA and CREF at retirement is complicated. You absolutely want to optimize your strategy and that usually involves minimizing taxes. TIAA, however, subjects you to a set of arcane and complicated distribution rules. These TIAA distribution rules can vary widely, depending on the type of retirement accounts you own.
If you’ve had a long career, you likely have multiple contracts, even if you’ve been with the same university the entire time. Each contract might have its own set of distribution rules and restrictions. If you’ve been with multiple universities, that complicates things even further.
It’s important to get the basics down and know your options before making critical decisions that will impact both you and your family. Let’s start with summarizing the available options for accounts not subject to some of the more onerous restrictions common in contracts in which you can own the TIAA Traditional Annuity.
Let’s assume for the moment you have funds in either an IRA or in TIAA-CREF on which you have not paid income taxes. Unlike with Roth accounts, income taxes will eventually be due. Let’s also assume that you are deemed “retired” or “service terminated” from the university that was the source of your TIAA-CREF account. This type of tax status is consistent with many types of retirement plans, including IRAs or traditional retirement plans in the private sector like a 401(k) plan. Please note that it is also consistent with a 457 plan that often is available to professors even though they don’t know about it.
Most of the 650 university faculty clients that I work with have far more money in their retirement plans than outside their retirement plans. If you are in the same boat, unless you plan to leave all of this money to charity, someone – either you or your heirs – will eventually have to pay income taxes on it. The SECURE Act exacerbates the tax consequences Figuring out the best strategies for mitigating taxes has always been a nightmare for professors with large retirement accounts, but the nightmare becomes much worse with the new SECURE Act law. Add in the likelihood of higher tax rates down the road and making a plan to constrain a potentially enormous income-tax punch to your retirement plan is critical.
This article, however, addresses only one piece of the puzzle. It doesn’t cover optimal tax reduction and estate planning strategies. For more information on those topics, please read our most current book, Beating the New Death Tax. It will provide the best and most relevant information for retired faculty until I finish my book (in progress) on optimizing finances for professors.
Distribution Options for CREF
Let’s start by looking at the retirement distribution options for your CREF as well as IRA accounts (not your TIAA accounts).
1. Withdraw Everything
You could withdraw all your accumulations. This would be just about the poorest choice you could make (think stupid) because you would lose all of your tax advantages. Money withdrawn from a Traditional account would be subject to income tax; money withdrawn from a Roth account would lose the tax shelter on future earnings.