IRA: Congress Feels Your Pain

Recognizing the bear market’s severe impact, lawmakers approved an economic relief measure before they adjourned earlier this month that can be a big deal for most older retirement investors.

The legislation suspends for 2009 the rules that force older individual retirement account holders and their beneficiaries to take minimum annual withdrawals, or what’s referred to as RMDs (Required Minimum Distributions).

The legislation, called the Worker, Retiree, and Employer Recovery Act of 2008, applies to RMDs for IRAs, 401(k)s, 403(b)s, and similar plans. It only applies to withdrawals in 2009, so 2008 needs to be taken, and they will be back in force (barring any changes) for 2010.

Under the current rules, IRA owners must take an RMD from their accounts starting in the year when they reach age 70 1/2. The minimum distribution for a year is calculated against your IRA end-of-year balance the previous year; in 2008, the withdrawal was geared to the higher market valuations that prevailed at the end of 2007. The rules also affect anyone who has inherited an IRA from someone already past age 70 1/2.

With last year’s ravaged portfolios, the RMD was particularly thorny – typically about $20,000 for a portfolio worth $500,000. If you failed to take the distribution, you would have paid a steep 50 percent penalty plus the tax required on the amount you should have withdrawn but didn’t.

This tax relief really helps people who can afford to not withdraw funds for living expenses – or those who might be able to take less than the RMD that otherwise would be required. If you do have other sources of money to pay bills, this legislation allows you to leave more money in your tax-deferred IRA, giving it time to rebuild and grow as the market recovers.

The RMD suspension also could save you money on your overall tax bill. Since you won’t have RMD income reported on your tax return, you could drop into a lower tax bracket.

About Paul Nichols

Paul is the founder of Financial Abundance, a Registered Investor Advisory firm and EDI, an Estate Planning Firm with offices in State College and Lewisburg. He has been working with individuals, families and businesses for over twenty years, including many Fortune 500 companies. He has educated tens of thousands of people through seminars, workshops and various international speaking engagements where he shared the stage with many notable individuals such as Ronald Reagan, Robert Kiyosaki (author of Rich Dad, Poor Dad), Mike Ditka, General Schwarzkopf, and Newt Gingrich to name a few.

In 2000, after many years of traveling to consult companies and individuals, Paul decided to relocate from Colorado to State College, PA (his wife’s hometown) to develop a local advisory firm.

Paul operates under the core belief that education plus understanding leads to clarity and confidence; resulting in peace of mind. He is a proud father of three and devoted husband of 20 plus years.

Some of Paul’s accomplishments:
Regular contributor to the Centre Daily Times, via the “It’s Your Money” blog
Featured in the movie Navigating the Fog of Investing
Regular contributor to Town & Gown as the publications Investor Coach
Host of the weekly iTunes Podcast, It’s Your Money
Member of the Western PA Better Business Bureau
Member of the Centre County Chamber of Business and Industry