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Washington to Seniors: RMD Vacation is Over. Pay Up.

The Obama Administration's focus on retirement security apparently doesn't extend to senior citizens.

According to a report in the Investment News there is little chance that the Required Minimum Distribution rule that was suspended for 2009 will again be waived for 2010. That means seniors with tax-deferred accounts such as Traditional 401(k)s and Traditional IRAs will once again be forced (required is just the polite phrasing) to cash out a portion of their accounts in 2010. The sole purpose of this exercise is to stuff government coffers, as 100 percent of withdrawals from tax-deferred accounts are subject to taxation. The RMD rule requires annual withdrawals beginning no later than April 1 of the year after you turn 70 ½; the amount of the forced withdrawal is based on life expectancy.

Crash? What Crash? The RMD rule was suspended in 2009 to help seniors sidestep the cardinal sin of investing: selling low. After the devastating bear market hit in 2008, Washington had the good sense to recognize that no one should be forced to sell at depressed levels merely to satisfy the IRS. But that was so last year. Apparently the 26.5 percent rebound in the S&P 500 in 2009 is good enough to turn off the worry for seniors, and start the RMDs again this year.

But last I checked, even with the strong 2009 rebound seniors aren't exactly back in sun city when it comes to their retirement assets:

  • The S&P 500 is still 30 percent below its October 2007 peak.
  • Traditional sources of fixed income have all but vanished thanks to the Federal Reserve's insistence on keeping the Fed Funds rate close to zero. It's not exactly happy times for seniors dealing with CDs yielding one percent and five-year Treasuries yielding less than 2.5 percent.
  • There was no COLA adjustment to Social Security benefits for 2010 due to officially low inflation. (Ask any senior if in fact their living costs didn't go up in 2009 and you will get quite an earful.)
Retirees Left out of Middle Class What is interesting to me is that just last month the administration released its Middle Class Task Force report (PDF) that in fact featured many proposals to increase Americans' retirement security. While the main focus was on increasing retirement savings, there was also mention of an initiative directed at the withdrawal phase of the retirement challenge. The administration is pushing for the inclusion of fixed annuities as part of retirement plans to improve the odds that Americans won't draw down their assets too fast in retirement. If that's on your radar, then why not also revisit the RMD as well? If your concern is that folks don't run out of money, why force them to make withdrawals in the first place? Sure, retirees can simply turn around and reinvest their RMDs, but that's after Uncle Sam has extracted his tax take.

And at the end of the day, this is all about tax revenue. Uncle Sam doesn't have enough. The RMD is a nice revenue source. It just seems a bit tin-eared to not consider the timing of bringing it back right now.