Imagine that your retirement savings have shrunk to nearly half, or even less, of their former value. Now imagine that you’re being forced to take out a big chunk of those savings, rather than leaving your money where it has a hope of recovering.
If you’re 70 years old or older, this won’t strike you as fanciful. That’s exactly what’s happening to older retirees required to draw down their savings annually through something called Minimum Required Distributions (MRDs).
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. The amount is calculated by taking the value of the funds on Dec. 31 of the previous year and dividing them by a number based on the account holder’s statistical life expectancy.
But this year the market has plummeted, taking a huge chunk out of the value of retirement accounts compared to the end of last year. For instance, as of Oct. 27, Standard & Poor’s 500 Index had fallen by about 42 percent.
The reason behind the MRD law is that it allows the IRS 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 IRA that was worth $100,000 on Dec. 31, 2007, now has to take that same amount from an account possibly worth only $60,000—or face a high tax penalty.
Help may be on the way. Both presidential candidates have called for a suspension of the MRD, as have key members of Congress, AARP and the American Benefits Council, whose corporate members sponsor employee and retiree benefits. In a letter sent to Treasury Secretary Henry Paulson on Wednesday, Oct. 29, AARP CEO Bill Novelli urged him to issue “an immediate, temporary freeze” on the required distributions.
Whatever happens needs to happen fast, because most withdrawals have to be made by Dec. 31. In addition, many retirees have already taken their withdrawals—many do it monthly. Vanguard, an investment management company, says that about 70 percent of shareholders who have signed up for its MRD service have taken all or some of their distributions.
Earlier this month, the chairman of the House Committee on Education and Labor, George Miller, D-Calif., and Robert E. Andrews, D-N.J., who heads the Health, Employment, Labor, and Pensions Subcommittee, wrote to Secretary Paulson requesting that Treasury suspend the requirement. “American workers have lost $2 trillion in retirement savings over the past 15 months,” they wrote. “This estimate underscores the fact that retirement security is one of the greatest casualties of the present crisis.”
One question is whether the Treasury has the authority to suspend the distribution requirement. Miller and Andrews say yes, but if that view doesn’t prevail or if more than a simple suspension is needed to protect those who have already taken their distributions, it may take a lame-duck session of Congress to deal with MRDs.
A generation of retirees will be watching.
Martha M. Hamilton, formerly with the Washington Post, writes a regular column, Your Financial Future, forAARP Bulletin Today.If you have decided to delay retirement because of the current economic crisis and are willing to be quoted by name in a column, please e-mail Bulletinmoney@aarp.org and put Martha Hamilton in the subject line.