Seniors Could Get Tax Relief on Retirement Account Distributions
December 14th, 2008
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The U.S. Senate voted to ease rules that require seniors to take distributions from their retirement accounts. President Bush still has to approve the bill that would waive penalties for people 70½ and older if they don’t take required minimum distributions from IRAs, 401(k)s and 403(b)s next year.
The legislation is aimed at helping seniors who have seen huge losses in the stock market and don’t want to take distributions from retirement accounts until the market begins to recover. Not taking required distributions can result in a 50% tax penalty on the amount that should have been withdrawn. For example, if you were required to withdraw $5,000 a year on your retirement account, you’d face a penalty of $2,500. Furthermore, normal income taxes would still be owed on top of that.
Some seniors have been reluctant to tap their requirement savings as the market has plunged, causing them to be liable for the penalty. The S&P 500 has fallen 38% this year and nearly 50% in just November, according to CNN Money. The Nasdaq has fallen 40%.
“Americans expect Congress to help guard their retirement savings and the measures in this bill will allow folks to avoid being saddled with a tax hit that wouldn’t exist under normal market conditions,” Senate Finance Committee Chairman Max Baucus said in a statement.
In addition, the Treasury Department is considering measures that could help those who took retirement distributions this year. Required minimum distributions are based on Internal Revenue Service tables that take into account life expectancy and retirement account balances, David Levine, a partner at Groom Law Group in Washington, told Bloomberg. He said a person who is 70 and has an IRA with $200,000 would be required to withdraw $7,300 this year.