Why Minimum Required Distributions Are Bad

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In an article written by Martha Hamilton for the AARP Bulletin, she addresses the current economic crisis and why a Minimum Required Distribution will affect individuals 70 years and older.

According to her article, “Current tax rules require investors to begin withdrawing certain minimum amounts annually from their Individual Retirement Accounts and 401(k) plans when they reach age 70 1/2.”

There is a problem, however. Due to the financial crisis, a market downturn resulted in a decrease in the value of 401Ks and other retirement accounts to the tune of 42%.

Thus, the MRD law came into play. As stated by Ms. Hamilton, "The reason behind the Minimum Required Distribution law is that it allows the Internal Revenue Service to collect taxes that were deferred when the money was put into savings. But thanks to the decline in the market, older Americans will have to take withdrawals that were calculated based on last year’s higher values.

For example, a 75-year-old who has to withdraw $4,366.81 from an Individual Retirement Account that was worth $100,000 on Dec. 31, 2008, now has to take that same amount from an account possibly worth only $60,000 or face a high tax penalty.”

If you are one of the millions of people affected by this situation, there may be a light at the end of the tunnel.Congress and the Treasury are trying to put a hold on MRDs right now. This is critical since withdrawals have to be made by the 31st of December.

Over two trillion dollars have been lost due to the current financial crisis it is estimated. Individuals who have retirement savings are in jeopardy of losing even more of their hard-earned money. This is bad for saving for retirement.

Currently, there is a proposal to include in the second Stimulus Package a ten-point plan devised by the American Benefits Council. One of the major points included in this proposal is:

“To allow retirees a chance to keep their retirement accounts whole while catching the market on the upswing by temporarily suspending minimum required distribution rules.”

It will be up to Congress to pass this legislation in the next few weeks, after President-Elect Obama is in office.

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