Mandatory IRA Withdrawal Confuses Seniors

Millions of retirees who are turning 70-1/2 are forced to take money out of their tax-deferred IRAs or 401(k)s each year, or pay a stiff penalty to the government.

The required minimum distribution rule was developed more than 20 years ago to ensure that the tax-deferred accounts are used for retirement purposes and not to help people accumulate money tax-free and pass it on to their heirs.

Many seniors are unprepared for the withdrawal requirement and are zapped with huge penalties, 50% of the amount that should be withdrawn. Retirees who forget to take a withdrawal one year are often required to take two-year’s worth the following year, which can bump them into a higher tax bracket.

Financial advisers are calling for changes to the rule, particularly as people are living longer and need to let their savings earn as much as they can.

“We haven’t reviewed this in a long time, and it needs to be reviewed in light of the fact that people are living longer,” said Sen. Charles Grassley (R-Iowa), a ranking member of the Senate Finance Committee. Grassley told the Associated Press the law should be simplified and said he would consider pushing the age limit back.

Former Treasury Department attorney J. Mark Iwry, who is a senior fellow at the Brookings Institution, said he also favors changes to the rules.

“Exempting individuals whose account balances are below a specified threshold could spare millions of people from having to comply without compromising the main purpose of this provision,” Iwry said.