Friday, October 10, 2008 at 3:06 pm
McCain's retirement-account liquidation idea
John McCain is suggesting on the campaign trail today that the IRS rules that require owners of retirement accounts (IRA, 401ks, etc.) to withdraw a certain amount (there's a formula) from those accounts every year after they turn 70 1/2 ought to be suspended because of the market crash.
Sayeth the Senator from Arizona:
To spare investors from being forced to sell their stocks at just the time when the market is hurting the most, those rules should be suspended.
It doesn't seem like a bad idea at first glance. If there are any tax lawyers or others out there who think it is, please let me know. But it also seems pretty trivial. First of all, the only people the suspension would help are those who don't need the money right now. And for the bulk of retirees (that is, people in their 70s) the required annual withdrawal amount is 5% or less of the total in the account. Still, this could be a big deal for 100-year-olds, who must withdraw as much as 16% a year. They should definitely vote for McCain.
Update: From jstnorv in the comments:
I can't believe that no one on McCain's staff knows that you do NOT have to take IRA distributions in cash. You can transfer stocks or mutual funds in kind to a taxable account and depending on the situation could actually benefit from doing so. Do they not know this? I can understand individuals not knowing this but I find it inconceivable that no one on his staff does.
If that's the case, then the verdict on this proposal is clear: Completely bogus.
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Friday, October 10, 2008 at 3:31 pm
I think a similar formula also applies to those who elect to start withdrawals before 59 1/2, which may affect a larger audience. People may elect to hunker down and live off of Social Security or other investment accounts during this time. It's useful, but not a barn-burner.
Friday, October 10, 2008 at 4:14 pm
@Curmudgeon: I was just reading IRS Publication 590 (big fun!), and as best I can tell there are no required withdrawals before 70 1/2, even if you start before 59 1/2.
Friday, October 10, 2008 at 6:51 pm
First of all, the only people the suspension would help are those who don't need the money right now
what makes you think that is true? I'm not sure of the timing provisions, but isn't it likely that mandatory withdraws have to be done by the end of the calendar year -- and that those who had planned on liquidating some of their stock and (especially) bond holdings will be forced to sell when the market is at a low point. Now all retirees saving are in accounts that require them to reduce the principal each year --- and depending upon where their money is, it might make more sense for them to cash in non-IRA assets at this point.
Friday, October 10, 2008 at 7:08 pm
@lp1: Good point.
Friday, October 10, 2008 at 8:02 pm
I can't believe that no one on McCain's staff knows that you do NOT have to take IRA distributions in cash. You can transfer stocks or mutual funds in kind to a taxable account and depending on the situation could actually benefit from doing so. Do they not know this? I can understand individuals not knowing this but I find it inconceivable that no one on his staff does.
Saturday, October 11, 2008 at 5:11 pm
Remember that the distribution is based on the value of the account on 12/31/2007. If the account has gone down a lot in value, you could be forced to take a rather high percentage of the account value and move it to where later capital gains would be taxed. I'd like not to have to do that.
I really don't see how this solves our liquidity crisis, however.