No distribution required. Good idea?
Monday January 12, 2009
The government eliminated the 2009 minimum distribution requirement. (It did not waive it for 2008.) Folks over 70 1/2 who would otherwise be required to take funds from their qualified accounts or face a 50% penalty will not need to do so for the 2009 tax year.
This leaves me a question and I'd like your opinion:
Does this temporary rule change matter?
If you're a retiree, can you afford not to take your distribution? Many cannot.
If you can afford to wait to take your money until 2010, it's nice not to be forced to sell at a depressed price, but so what? You could have just bought back the security in your taxable account anyway, no true loss realized. Meanwhile the government, which is a bit of a deficit itself, voluntarily gives up more tax revenue. Strange? Not strange?
What do you think?
This leaves me a question and I'd like your opinion:
Does this temporary rule change matter?
If you're a retiree, can you afford not to take your distribution? Many cannot.
If you can afford to wait to take your money until 2010, it's nice not to be forced to sell at a depressed price, but so what? You could have just bought back the security in your taxable account anyway, no true loss realized. Meanwhile the government, which is a bit of a deficit itself, voluntarily gives up more tax revenue. Strange? Not strange?
What do you think?
For those seniors who are financially secure and want to pass some of their estate to their heirs in a tax effective manner, eliminating RMD’s for even one year can be a benefit.
There are two kinds of people; those who will do nothing and watch their life savings consumed by the costs of long term care; and those who have found a way to pay for the long term care AND preserve their dignity by staying at home, and still leave an inheritance to their loved ones by buying long term care insurance with contractually guaranteed full refund of all premiums, no matter what. There may also be considerable tax relief by doing this with tax deferred funds from and IRA or 401K.
The question “can many retirees afford not to take their minimum dustrbution” is short sited. Assuming a retiree has ANY money other than their IRA, it make sense to SPEND that principal and allow funds in the IRA to grow yet another year, tax deferred and avoid the 2009 IRA distribution. There is no difference between princpal and interest–this is a made up distinction to help people think about their money. It’s all green and the goal is always to allow the tax sheltered money grow.
The RMD should be eliminated. The RMD is another example of interference by the government in our financial affairs. Some of us are very lucky to have started early in our working life with our tax deferred retirement accounts. Some of us also have a pension. We are very lucky and do not have to tap our IRA/401k accounts for income at this time. The RMD and the 50% penalty for not meeting the RMD is another reason to consider the conversion to a Roth and, threfore, no RMD.
@GoTo: You’re right, every little bit of tax deferral helps the assets grow. Of course, there’s always the estate tax to monitor if there’s enough wealth there.
@Jonathan-long term care expenses can absolutely sabotage an otherwise sound retirement plan. I’m skeptical one product can completely solve all potential issues, but ignoring long-term care concerns is a potential issue for almost anyone and it is too commonly ignored. Thanks for bringing it up.
@Bob: If you can afford to delay the distribution, that’s preferable. My point is that the one-year break from RMD is likely to only help those who can afford not to take the distribution in the first place. Sure, it’s nice if you’ve got money in and out of retirement plans, but many people simply do not.
Lucky-While I agree with you and it’s another great benefit of the Roth, I wouldn’t hold my breath. The government’s debt just keeps growing and sooner or later we’re going to have to pay it back and they’ll be looking for more tax revenue, not less.