"Retirees with less than $50,000 in their individual retirement accounts may not have to take required withdrawals under President Barack Obama’s proposed budget."
-Bloomberg (Feb 14, 2011) “Obama Budget Would Exempt IRA Distributions for Small Accounts”
The quotation above is interesting news given that Americans hold nearly $4.2 trillion in traditional IRAs. That money has yet to be taxed, so it’s no wonder that the government requires you to take your money out and start paying taxes on it. Required Minimum Distributions generally apply once you turn 70-1/2 years old. The required distribution amount is determined by a formula based on your account balance and your age (check out the calculator from Kiplinger on at the previous link. And yes, your IRA balances ARE included in your estate for estate tax purposes.
Bloomberg reported last week, however, that the Obama administration proposes to do away with minimum distributions on IRAs worth $50,000 or less.
If this measure passes, it could impact a lot of people. The median amount of money held in a traditional IRA is only about $40,000. And, according to the Investment Company Institute (a Washington-based mutual-fund trade group), quite a few people would prefer to leave their money in their accounts. In fact, according to their recent study, 64% of people who took money out of their IRAs in 2008 (the last relevant year with available data) said they did so only to comply with the distribution requirement.
By foregoing distributions (if your IRA is worth less than $50,000) you could let your funds continue to grow, defer the taxes, and perhaps stretch your retirement savings a little further.
As an estate planning attorney, I have an opportunity to see the composition of many clients' estates--and I an think this would be a huge benefit to a number of my clients. Check to see if this would impact you--consider the additional tax you pay on your small traditional IRA as you prepare your taxes.
Stay tuned to this blog for updates as they develop.