Making Your Money Last

Treasury to Seniors: Drop Dead

IRA owners must act quickly to take required 2008 payouts.

By Joan Pryde, Senior Tax Editor, the Kiplinger letters

Kevin McCormally, Editorial Director, Kiplinger.com

December 18, 2008

The Treasury Department decided Thursday not to grant relief in 2008 from rules that require Americans 70 1/2 and older to take minimum annual withdrawals from their IRAs, 401(k)s or other retirement plans. The disappointing decision led some of those affected to recall the famous 1975 New York Daily News headline "FORD TO CITY: DROP DEAD," after President Gerald Ford opposed efforts for a federal bailout of New York City.

For months, there's been talk of some sort of break for seniors whose retirement accounts have been battered by the severe stock-market meltdown. Why force seniors who don't need the money to withdraw money from already depleted nest eggs? During the presidential campaign, both Barack Obama and John McCain backed relief. And, earlier this month, Congress passed legislation waiving required payouts in 2009.

Those facts, plus hints from the Treasury (which oversees the IRS) that some sort of relief would soon be granted, led many senior citizens to postpone taking their required minimum distributions (RMDs). But Treasury decided Thursday that it does not have the authority to waive payouts and that any relief short of that -- such as allowing a smaller sum to be taken -- would be complicated and confusing, and would not be fair to seniors who already had taken their RMDs for the year.

So, if you've been delaying a withdrawal, delay no more.

Contact your IRA or 401(k) sponsor as soon as possible to request the payment. (If you have parents or grandparents who may be affected by this decision, make sure they know about it.)

If you have more than one IRA, your RMD for 2008 is based on the total balance of all of your IRAs as of December 31, 2007, but you can take the money from any one or combination of the accounts. If you have more than one 401(k), a minimum amount must come out of each plan.

Failure to withdraw the minimum amount by December 31 will trigger one of the most vicious penalties in the tax law: The IRS will claim 50% of the amount you should have withdrawn.

There is one exception to the December 31 deadline -- for those who reached age 70 1/2 during 2008. Because this will be their first RMD, they can delay it to as late as April 1, 2009. Doing so normally requires an account holder to withdraw -- and pay tax on -- two years' worth of distributions in a single year, because the second-year payout would be due by December 31, 2009. And that could push you into a higher tax bracket. But that won't be a worry in 2009, since Congress has waived the RMD rule for the year.

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