Further compounding employees retirement planning concerns, a new IRS ruling reduces by about 60% the amount they can withdraw without penalty before age 59-1/2. Issued earlier this month, the rule is designed to prevent retirees from outliving their savings. Yet some tax experts say the pared-down withdrawal amounts and the adjusted interest rates for amortized or annuitized payouts may prevent retirees from being able to meet their financial needs year to year. According to the new rule, retirees may no longer use a "reasonable rate of return" to calculate payouts during the year. Citing abuses of the rule in which taxpayers claimed a 10% rate of return or higher, IRS has declared a fixed rate, set at 120% of the federal mid-term rate, which oscillates monthly between the one-year and 10-year Treasury note. Thus, distributions based on the 8% rate that many taxpayers previously claimed are a far cry from Augusts 3.2% federal mid-term rate. Despite the looming effective date, employees hoping to retire early can hope for congressional action to reverse the rule. A provision in House Resolution 1776 would maintain the current "reasonable rate of return" rules.
