Minimum Distribution Relief?

Treasury mulls options

By Kaye A. Thomas
Posted November 14, 2008

Working around the problem.

People over the age of 70½ holding retirement accounts other than a Roth IRA are required to take minimum distributions each year. The size of the required distribution is based on the age of the account owner and the size of the account as of the end of the preceding year. The recent market turmoil has left many people with sharply reduced account balances. As a result, someone required to take, say, 8% based on the account balance as of the end of 2007 may actually be withdrawing 10% or more of the actual account balance after these market losses. AARP and some members of Congress have been lobbying the Treasury to relax the requirement for this year. The Treasury responds that it is "considering ways that this unanticipated situation could be ameliorated administratively." I'm not privy to the Treasury's thought process, but here are some relevant considerations.

Treasury's authority

There's some question as to whether the Treasury has the legal authority to change this rule. The required minimum distribution rule is part of the tax law as enacted by Congress. The Treasury has a duty to interpret and administer the law, but can't make unilateral changes.

Perhaps the Treasury can somehow reach the conclusion that it has the authority to make this change, but then it would face the question whether administrative problems make the idea unworkable for 2008.

Administrative issues

Suppose the Treasury announced today that people could take their 2008 required minimum distribution based on the current account balance rather than the balance at the end of 2007. What problems would that create?

I'm guessing the problems would be huge. To begin with, IRA providers and 401k plan administrators would have to create out of thin air the capacity to calculate the reduced minimum. The lead time needed to reprogram their computers is much more than the few weeks we have left until the end of 2008.

Then there's the problem of all the people who've instructed their IRA providers to calculate the smallest amount needed to satisfy the requirement and send that amount at the end of the year. IRA providers would need to contact these people to find out whether they want to receive the old minimum or the new minimum. Some people would choose to receive the new, reduced amount, but others may have cash needs more in line with the old minimum. Can you imagine all the mutual fund companies, banks, brokers and insurance companies gearing up to identify all the people who are affected, contacting them with a message explaining their new choice, getting a response, and then acting on that response, all during the short period of time left in 2008?

Working around the problem

For the reasons stated above, I'll be surprised to see the Treasury grant relief from this rule for 2008. The question then becomes how to preserve your retirement savings in the face of a requirement to withdraw this larger amount from your IRA.

The minimum distribution rule doesn't require you to spend the money you take from your retirement account. If you're being required to take more than you would like from the account, you can pay tax on the distribution and set the rest aside in a regular investment account. Any earnings generated in this account will be taxable, but careful management of this account can minimize that effect. Generally it's preferable to keep your money inside a qualified retirement account, but with the right approach, most people can achieve nearly the same results if they preserve some or all of the required minimum distribution in a regular investment account. A required distribution reduces the size of your IRA, but it doesn't have to be a significant reduction in the amount of money available for later years in your retirement.