ShareThis Page
Retirees benefit from exemption on withdrawals |

Retirees benefit from exemption on withdrawals

The Associated Press
| Monday, October 19, 2009 12:00 a.m

DES MOINES — Hundreds of thousands of retirees have more money in their accounts thanks to a one-time waiver of a government required withdrawal that kicks in after age 70.

Investment advisers say it’s saved tens of thousands of dollars for many by allowing them to keep their money invested as the stock market began to recoup some of its losses.

A law passed last year temporarily lifted the mandated withdrawals, called required minimum distributions, for those who are 70.5 this year or older. The aim was to prevent retirees from being forced to withdraw money from accounts hit hard by falling stock values.

“It turned out to be an extraordinarily helpful thing the government did,” said Steven Schwartz, a financial adviser and founder of Wealth Design Services in Rochester, N.Y. “It really saved a lot of people a lot of money.”

Defining the RMD

The RMD is a federal rule designed to ensure the government, at some point, is able to tax retirement account funds, which have been growing tax free.

It applies to IRAs and employer sponsored retirement plans including 401(k)s and profit sharing plans. Roth IRAs are not included because contributions to these accounts have already been taxed.

Retirees, who might not otherwise take money from their accounts for living expenses, at 70.5 must begin taking a specified amount of money out to pay taxes on their untaxed holdings. Failure to do so results in a 50 percent penalty on the amount that should have been withdrawn.

The required distributions are calculated based on the account balance and the life expectancy of the account holder as determined by IRS actuary tables.

Numerous Web sites offer RMD calculators. The Financial Industry Regulatory Authority offers a simple one online.

What the one-year waiver means

President Bush signed the Worker, Retiree and Employer Recovery Act in December 2008, which waived the RMD for this year only. That was at the height of the financial crisis as the stock market plummeted in response to bank failures and broader economic worries.

If the RMD waiver had not been enacted, retirees would have been forced to pull money out of invested accounts based on year-end 2008 balances, when stock prices were near the bottom.

The S&P 500 dropped 38 percent from Dec. 31, 2007, to Dec. 31, 2008. It fell even further until bottoming out in March. Since then, the index has risen nearly 57 percent.

Lifting the RMD for this year has reassured some retirees by not forcing them to realize losses on their investments. For example, someone with a $100,000 account and a required distribution of $10,000, may have saved as much as $14,000, said Dean Kohmann, vice president of 401(k) plan services at Charles Schwab Corp.

Many will benefit by not taking the required distribution because their taxable income will be lower, and they may not have to pay taxes on their Social Security income for the year.

The IRS says about a third of Social Security recipients earn enough to pay income taxes on the benefits.

Now that the recession’s end may be in sight and markets are edging up, there seems to be little interest in extending the waiver another year. That may be in part because the RMD brings in significant revenue for the government, although the IRS says it can’t say how much exactly.

The Investment Company Institute, a trade group, says more than $7 trillion is held in IRAs or employer-sponsored retirement plans, most of which must comply with RMD rules.

Among IRA owners, about 64 percent said they took money out of their accounts in 2008 only to meet the RMD requirement.

There have been efforts in the past to change the RMD rules. Opponents of the mandatory withdrawals believe it places too much burden on retirees who frequently also face higher health care costs and other expenses.

Changes, most recently proposed in the late 1990s, would have increased the age to 78 from 70.5. Other proposals would have exempted RMDs for accounts under $300,000.

“Anytime you’re not required to take the money out, that’s a good thing,” said Daniel Morris, a San Jose, Calif., accountant with Morris & D’Angelo. “You don’t have to pay the tax on it and it has an opportunity to float with the market, which will hopefully be more up than down.”

RMD resumes in 2010

The next RMD will based on account balances as of Dec. 31, 2009. For those who turned 70.5 this year and would have taken their first distribution, they must do it by Dec. 31, 2010.

IRA and 401(k) account administrators typically manage required distributions and send notices about the withdrawals, but the IRS holds the account owners responsible for ensuring the distributions are taken on time.

The best advice is to understand the basics of the RMD and as you approach 70.5 and discuss the mechanics of how you want the distribution handled every year with a financial adviser or accountant.

If you had an automatic withdrawal set up and your RMD was taken out this year, the IRS has recently issued rules that allow you to roll the money back into an IRA, basically a do-over, said Schwab’s Kohmann. But you’ll need to act quickly, the deadline in Nov. 30.

Categories: News
TribLIVE commenting policy

You are solely responsible for your comments and by using you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.