Now millions of older adults are seeking last-minute help with a problem that directly affects Main Street: required withdrawals from retirement accounts.
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.
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older the account holder, the greater the percentage of IRA investments that the Internal Revenue Service requires be withdrawn.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.
Taking Losses
What's causing headaches is that RMD amounts are based on account values from Dec. 31 of the previous calendar year. In any year, of course, financial markets can post significant moves over the course of the year. But this year -- with stocks down by more than a third -- seniors are being forced to withdraw amounts of money out of proportion to their current account values.
Theodore Beckley, an 82-year-old former engineer, has seen stock in his IRA lose about 70% of its value since the start of the year. At his age, the RMD will force him to take out half of the remaining money in his account.
Last month, when stocks were at their lows for the year so far, the Colorado resident calculated that in order to make up the amount of money he's being forced to withdraw, his remaining investments would have to rise 308% by the end of the year. "I have to cash out so much stock to get the distribution that I'm not going to have enough stock left to do anything with," says Mr. Beckley.
In Arizona, Patricia Wood, a 69-year old former schoolteacher, and her 72-year-old husband have seen their IRA lose more than 40% of its value. And with the IRA in her husband's name, the rules will require an additional 7% of the money to be withdrawn.
Forced to Sell
Ms. Wood says that, even with the steep downturn in the market, "our plan is to not panic and sell, but to hold on to our IRA, with the personal conviction that the stock market and our economy will stabilize and recover well." Being forced to sell at this point, she says, is "counterproductive."
In recent years, there has been some talk in Washington about changing the distribution rules to account for longer life spans. One suggestion: Delay the first required distribution until age 75. Suggestions have also been floated about exempting from the RMD those IRA holders with relatively smaller amounts of money. But the collapse in the stock market has now focused attention on the issue.
Will Washington act? There are, of course, complications. Many people have already taken their distributions through installment plans. How would they be treated? And what about the potential loss of tax revenue? Allowing millions of people to skip an RMD would mean the federal government -- already strapped for cash -- would lose tax dollars associated with those withdrawals.
Ms. Wood recently received a notice from her IRA plan telling her she has to have the cash in place to take her RMD by Dec. 15.
"Time is even shorter than I realized," she says.
Email: encore@wsj.com.
source: wsj - encore : november 9, 2008
http://online.wsj.com/article/SB122618338831011321.html
Rory Vanucchi
RoryVanucchi@gmail.com
www.LasOlasLifestyles.com
www.FortLauderdaleLiving.net
Posts
