Compliance November 26, 2008

Collins Asks Paulson to Cancel 2008 RMD Penalty

A Republican U.S. senator has added her voice to the chorus of those calling for changes in the rules governing required minimum distributions (RMD) from retirement savings plans.
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Senator Susan Collins (R-Maine) issued her call in a letter to U.S. Treasury Secretary Henry Paulson in which she urged Paulson to use his authority to suspend the RMD regulations “to mitigate the impact on retirees over age 70 세 who are required to withdraw funds from their 401(k) accounts or face stiff penalties,” and waive any penalties at least for the 2008 tax year.

If older Americans do not take the distributions, current law requires a penalty of 50% of the amount that should have been distributed. Collins said the law gives Paulson authority over the details of the RMD requirement.

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Collins also asked that the regulations governing the calculation of the RMD be revised so that the amount of the minimum distribution is set to the lesser of the account balance on the first day of the calendar year, and the account balance that existed on the last day of the calendar year.

“Forcing our nation’s retirees to liquidate (plan) assets at distressed prices makes little sense,” Collins wrote. “Such an outcome would not only be unfair to retirees, but would also work against our efforts to stabilize the financial markets.’

Two Congressional lawmakers called on the Treasury Department to suspend the RMD tax penalty in mid-October (see “Lawmakers Call for End of RMD Penalty“).

Compliance November 26, 2008

IRS Warns Business Funding Solution ROBS Retirement Plans

The Internal Revenue Service (IRS) has released a memo warning businesses that funding a business with your retirement plan may not be a good solution.
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Entrust New Direction IRA, Inc., explained in a news release that financial companies promoting the “Rollovers as Business Startups,’ or ROBS, arrangement claim the IRS has preapproved the arrangement for years. However, the IRS memo titled, “When ‘Too Good to Be True’ Very Well May Be: Funding Business Startups with Plan Assets” warns that ROBS arrangements will be scrutinized very carefully, “may violate the law,” and “may be prohibited transactions.”

If the arrangement is a prohibited transaction, the retirement account in question could be closed and the funds subject to excise taxes. The IRS says it will focus on any transaction that claims you can transfer money without paying taxes, according to the news release.

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The IRS memo says the agency has seen an increase in transactions that try to “exploit the generous tax benefits enjoyed by qualified retirement plans.” For business funding transactions, the IRS requires a custodian between the retirement plan holder and the retirement funds, and business owners cannot spend the retirement money on themselves or their companies.

Entrust New Direction IRA, Inc., said a solution it is offering is a new service, the IRA Card, which provides quick access to IRA funds but keeps the custodial layer between the IRA holder and the IRS. The IRA Card can be used like an ATM or a credit card for qualified retirement plans, providing easy access without compromising the tax-free or tax-deferred status, according to the news release.

More information is available at www.newdirectionira.com.

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