The U.S. House of Representatives approved legislation last night that would provide some relief to older Americans suffering from significant losses in their retirement accounts. The bill would temporarily suspend an excise tax levied on seniors who fail to take a required minimum distribution (RMD) from their retirement accounts. The penalty would be waived for 2009, thereby allowing seniors not to withdraw money from IRAs, 401(k)s, and 403(b)s while investments are low.
Under current law, savers who have reached age 70½ must take an annual required minimum amount from their retirement plan or IRA. The specific distribution amount is calculated by dividing the prior December 31st balance of the retirement account by your life expectancy as determined by the Internal Revenue Service. Failure to withdraw this amount and report it as taxable income subjects the account holder to an excise tax penalty of 50 percent of the amount that should have been withdrawn in addition to regular income tax.
For example, if you are required to redeem $1,000 from your IRA and fail to do so, the IRS claims $780: a $500 excise tax for failing to make the required withdrawal and another $280 for income tax you should have paid on the income, assuming you are in a 28 percent tax bracket.
The bill, however, did not address required minimum distributions for this year. The amount retirees are required to withdraw this year is based on the account balance on December 31, 2007. The value of most American’s retirement accounts have fallen dramatically since then. Many retirees are now facing the prospect of having to take their withdrawals after their portfolios have suffered significant losses.
The Secretary of the Treasury, however, has the authority to establish regulations governing how the minimum distribution shall be set. Senator Susan Collins (R-ME) and the AARP have both called on Henry Paulson, Secretary of the Treasury, to temporarily suspend the RMD for 2008. The Treasury has not yet announced any decisions.
The bill also includes temporary funding relief for companies with employer-sponsored pension plans that would otherwise be forced to make higher contributions when they are short on cash. “While we remain fully and unequivocally committed to the notion that businesses and unions must fully fund their pension obligations to their workers, the small step we’re taking today will provide much-needed relief to participants, plan sponsors, and beneficiaries in the short term, potentially staving off job cuts, benefit reductions, or financial burdens that would be far more harmful to workers and retirees in the long term,” says U.S. Rep. Howard McKeon (R-CA), a member of the Education and Labor Committee.
Provisions of the Pension Protection Act of 2006 currently require companies to raise their funding for pension plans from 90 percent to 100 percent over seven years. The target funding levels are 92 percent for 2008 and 94 percent for 2009, under current law. If companies don't meet that benchmark, they are forced to fully fund their pensions immediately. The bill would allow companies that fail to meet the 92 percent target this year to only have to come up with the cash to reach 92 percent, not 100 percent.