Compliance December 20, 2008

RMDs Still Required in 2008

In a letter to a top Congressional lawmaker this week, the Treasury Department said it will not suspend the required minimum distribution (RMD) requirement for 2008.
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Multiple members of Congress had called on the Treasury to suspend the RMD tax-penalty for 2008 (see “Two RMD Delay Bills Filed,” “Collins Asks Paulson to Cancel 2008 RMD Penalty,” “Lawmakers Call for End of RMD Penalty“).

Although the Treasury had previously announced they were considering offering relief for this year, in light of the passage of the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327), the letter, from Assistant Secretary for Legislative Affairs Kevin Fromer, said the Treasury would not implement such suspension.

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Fromer wrote: “Any steps Treasury could take would be substantially more limited than the relief enacted by Congress and could not be made available uniformly to all individuals subject to required minimum distributions. In addition, implementation of such changes would be complicated and confusing for individuals and plan sponsors. Thus, all individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules and, as a result of relief provided by Congress, they will be entitled to a complete wavier of the requirement to take any distributions for 2009.’

Congress thought the Treasury Department would address 2008 distributions through regulation, Education and Labor Committee spokesman Aaron Albright said in a statement, according to Bloomberg. “We are disappointed that the Treasury Department declined to act,’ Albright said, according to Bloomberg, noting that Congress acted with the “understanding that Treasury was actively working on a solution for this tax year.’

The Impact

The bill approved by Congress earlier this month suspends RMDs for calendar year 2009 and is expected to be signed by the President (see “White House Confirms Bush to Sign RMD Relief’). Several in Congress had thought that the Treasury Department would address 2008 distributions through regulation, rather than legislation.

Therefore, retirees older than 70 1/2 must take their required minimum distribution from any defined contribution plans (IRAs, 401(k)s, and 403(b)s) by Dec. 31 of 2008 or pay a tax penalty of 50% of that minimum plus income tax. The one exception to the December 31 deadline – for those who reached age 70 세 this year. Because this will be their first RMD, they can delay it to as late as April 1, 2009.

The Markets December 20, 2008

Participants to Washington: Hands off Our 401(k)s

Most of the millions of American workers who invest for retirement through a 401(k) plan are staying the course despite tumultuous markets, and want to preserve the 401(k)’s strengths, according to the Investment Company Institute (ICI).
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In a household opinion survey, the ICI said it found that Americans want to preserve the current features and flexibility of retirement plans and want Washington to emphasize strengthening Social Security.

The group said the poll of 3,000 households, conducted from late October to early December, found that:

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  • Seventy-two percent of all households reject the notion of reducing tax advantages for defined contribution retirement plans and Individual Retirement Accounts. Even among households that currently do not own such accounts, 62% oppose reducing these tax incentives.
  • Americans don’t want the government directing investments for retirement savers–87% reject a proposal that the government not allow individuals to make their own investment decisions in retirement accounts.
  • Participants in 401(k) and similar plans say the plan features help them save and invest. Nine in 10 of the 1,575 households owning such plans agree that their plan “helps me think about the long term, not just my current needs.” Some 88% say that “payroll deduction makes it easier for me to save.” And 81% say that “the immediate tax savings from my retirement plan are a big incentive to contribute.”
  • Strengthening Social Security is a much higher priority for Americans than replacing 401(k) plans with a government-run retirement system.

401(k) Plan Participants Still Staying on Course

A separate ICI study of records on 22.5 million participant accounts found that, despite the decline in account balances caused by the 40% decline in stock market values, the vast majority of savers are not transferring their assets.

ICI said the records, which cover the first 10 months of 2008, show:

  • Only 3% of plan participants stopped contributing to their retirement plan;
  • Just 3.7% of participants took any withdrawals from their accounts, including 1.2% taking hardship withdrawals; and
  • Fifteen percent of participants had loans outstanding, in line with the 13% to 17% figures reported since 1996 in annual studies conducted by ICI and the Employee Benefit Research Institute (EBRI).

“Workers want to keep the basic strengths of 401(k)s–tax-favored savings, individual choice in investing, and personal control of these retirement assets,” Paul Schott Stevens, ICI president and CEO, told a Newsmakers forum at the National Press Club in Washington. “Can 401(k) do even better? Yes.”

ICI released the two surveys in a white paper, “Retirement Saving in the Wake of Market Volatility,” that is available at http://www.ici.org/pdf/ppr_08_ret_saving.pdf.

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