Individual taxpayers, lobbying groups and even some politicians are pressing Washington to change the rules regarding “required minimum distributions” (RMDs) from individual retirement accounts, 401(k)s and related savings vehicles reports the Wall Street Journal.
The value of such accounts has fallen dramatically in the stock-market selloff, and seniors are loath to reduce their accounts further by taking required distributions.
Time Runs Short
Two weeks ago, AARP, the large membership group for older adults, asked the Treasury Department to give IRA holders the option of not taking a required distribution this year. It’s an idea backed by President-elect Barack Obama.
The problem, says David Certner, AARP’s legislative-policy director, is that time is running out. Typically, distributions must be taken by Dec. 31, and many account holders wait until November or December to withdraw the needed funds.
“People need relief,” Mr. Certner says.
Retirement accounts allow investors to save money for years without paying taxes. After reaching age 70½, however, account holders are required to withdraw a percentage from their savings each year. These required distributions were created to ensure that IRAs and related vehicles are used as a source of retirement income — and not as a tax shelter for passing money from one generation to the next. As a result, there is virtually no wiggle room for avoiding required minimum distributions.
(Uncle Sam does provide some flexibility with a person’s first RMD. You have until April 1 of the year following the year in which you turn 70½ to make your first withdrawal. For example: A person who turns 70½ at any point during 2008 can take his or her first withdrawal this year — or as late as April 1, 2009.)
Distribution requirements are for the most part based on the age and life expectancy of account holders. Essentially, the older the account holder, the greater the percentage of IRA investments that the Internal Revenue Service requires be withdrawn. The RMD also factors in the marital status of the account holder and the beneficiaries. (The actual calculation is based on a “distribution period factor,” in these IRS tables).
For a 75-year-old widower, for example, the distribution-period factor is 22.9. To come up with the required distribution, the account value is divided by the factor. So on a $50,000 account, the RMD would be $2,183. But a 90-year-old with the same status would have to withdraw $4,386.
Read more here: Tax Rule Slams Hard-Hit IRAs, 401(k)s