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Rule change aids some retirees

Monday, Dec, 15
Posted 10 a.m. EDT

Rule change helps some, not all, retirees

Thanks for nothing. That's what many retirees are saying to Congress after passage last week of a bill to suspend required minimum distributions.

These withdrawals, commonly referred to as RMDs, are mandatory once owners of certain retirement accounts turn 70½. After that, these folks must take distributions from their traditional IRAs, as well as any other tax-deferred retirement savings or pension plans, such as 401(k) workplace accounts.

The reason for RMDs is simple … if you're the IRS. For years -- many years in some cases -- the federal tax collector has watched these accounts earn money but couldn't touch any of it. So once account owners hit that magic septuagenarian birthday (or really, half-birthday), the law says the account holder must take out some money (the IRS provides tables to help you figure your precise amount) and pay taxes, at regular tax rates, on the withdrawal.

If you forget about or ignore your RMD, you'll pay big time. The law says the IRS can collect a 50 percent penalty on any missed required distributions.

With the stock market troubles this year, the RMD process took on a new urgency. Retirees are being forced to sell some of their nest eggs as the asset values have taken a hit. In some cases, it's meant retirement funds are sold at a loss.

New law for some: So last week, when lawmakers finally took action to ease the RMD burden, retirees rejoiced … until they saw the complete bill.

The Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327) waives RMDs and is now awaiting Dubya's expected signature. But it's only good news for some retirees.

Folks who are staring at a Dec. 31, 2008, RMD deadline will have to take out some money in a few weeks because the RMD suspension doesn't take effect until 2009.

Why didn't Congress include 2008 distributions? Who knows? This isn't something that snuck up on lawmakers.

Back in October, the House Education and Labor Committee held a hearing to examine the effect of the financial crisis on retirees. Or, as witnesses told the panel, the market downturn during the last few months has deepened retirement insecurity. The Congressional Budget Office backed up the testimony with numbers, reporting that Americans have lost $2 trillion -- that's right, trillion -- in retirement savings in just over 15 months. Those figures were run three months ago. Who knows what the damage is now.

In conjunction with the hearing, two Education and Labor Committee members wrote U.S. Treasury Secretary Henry Paulson, asking that his department take action to help older taxpayers who are facing a Dec. 31 RMD deadline.

"Specifically, we request that you suspend the required minimum distribution (RMD) and the tax penalty for retirement account holders who are 70 years or older who might not want to withdraw from their retirement accounts during the current financial crisis," wrote the Congressmen. Unless the penalty provision is suspended, they told Paulson, "seniors will be doubly penalized by the current crisis – first by experiencing a dramatic drop in the value of their retirement account holdings and second by forcing them to sell a portion of those holdings at a steep loss."

During the presidential campaign, both Barack Obama and John McCain voiced their support for an RMD waiver. And as the 2008 RMD has neared, other members of Congress joined the call for mandatory withdrawal relief.

Apparently, though, lamakers couldn't get on the same calendar page. So retirees who must take RMDs in a few weeks are left out in the tax-relief cold.

Help from Treasury? There is a tiny bit of hope that Paulson, who's had that Congressional RMD letter on his desk since October, will take steps to help out folks facing 2008 distributions or penalties.

Clint Stretch, managing principal of tax policy for Deloitte Tax, told USA Today that one possibility is that the Treasury could allow retirees facing an RMD in a couple of weeks to calculate their withdrawals based on the value of their IRAs at the end of 2008, instead of the end of 2007 as the law requires. That would result in smaller withdrawals for most seniors.

Treasury reportedly is "studying its regulatory options."

If Paulson and his employees have any shred of decency, they'll do this. If Treasury can change tax rules for banks, which the department has done repeatedly by issuing IRS notices during the financial crisis, they certainly can do a little something for older taxpayers.

-- Posted: Dec. 15, 2008

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