IRA's: Changing the rules?

The market meltdown has the Feds rethinking the rules on minimum required distributions from IRA's. According to today's Wall Street Journal, several ideas are being considered including allowing taxpayers to delay their distributions altogether. Another idea, endorsed by the Obama team, is to exempt from tax any withdrawals made this year and next up to the minimum required amount.

Although the details of the rules governing these distributions can be somewhat confusing for most people, the issue at stake is pretty straight forward. Once investors turn 70 1/2 years old, the IRS requires them to take a minimum distribution from their IRA, 401k or similar tax-deferred retirement savings programs. The withdrawal is taxed as current income. The amount that must be withdrawn is based on a set percentage of the value of the portfolio as of December 31 of the year preceding the distribution. For example, minimum required distributions for 2008 are based on portfolio values as of December 31, 2007.

The problem right now, of course, is that portfolio values today are well below their December 31, 2007 levels. Therefore, a distribution from an IRA taken today but based on year-end levels, represents a much higher proportion of the portfolio than originally intended. Requiring the higher proportion distributions could have huge ramifications for the ability of retirement accounts to last over the investors' lifetimes.

Given the uncertainty surrounding this issue, investors should probably hold off taking any required distributions for now. We can get the paperwork in place in case no changes are made this year and then submit the distribution requests in time to make the December 31 deadline. For those who have already taken their distributions, I am researching what recourse we might have. Like most everything else economic and political right now, this issue is moving fast, so stay tuned for further updates.