The Confusion Over Required Withdrawals
What lessons can we learn from the high-profile tax cases of newly installed Treasury Secretary Timothy F. Geithner and Thomas A. Daschle, President Barack Obama's failed pick for secretary of health and human services?
How about that the darn tax code is so complex and long that Geithner and Daschle did what so many others have done -- messed up big time? Geithner had to pay the government $43,000. Daschle recently wrote a check for $146,000.
Because we have no evidence that Geithner and Daschle intentionally cheated, I'm willing to give them the benefit of the doubt. But I'm getting tired of appointees with tax issues. If these folks have the money to get their taxes prepared correctly and still can't, the IRS better give enormous leeway to regular taxpayers.
That brings me to a recent tax change that I'm sure will cause a lot of taxpayers to make mistakes. It concerns the required minimum distribution that seniors have to make from their retirement plans.
For 2009 only, there will not be the usual required minimum distributions from retirement plans such as 401(k)s, Roth 401(k)s, 403(b)s and certain 457(b)s. The distribution rules also apply to traditional individual retirement arrangements and accounts and IRA-based plans such as Simple IRAs and SEPs (simplified employee pension plans), which provide employers with an easy method to make contributions toward their employees' retirement or the self-employed an easy way to contribute to their own.
Normally, tax law mandates that people with certain retirement plans take a minimum withdrawal every year after reaching age 70 1/2 . Those who fail to take the minimum distribution face a huge penalty. The amount not withdrawn is taxed at 50 percent.
I wrote about this one-year waiver and, not unexpectedly, some seniors had questions. Here are a few I received, along with answers from the IRS:
QAs a result of the law change, will it mean a double distribution requirement in 2010?
AIf you decide to skip a distribution for 2009, you will not have to double the amount required for next year. The waiver for 2009 is not a deferral.
Has there been any more discussion about providing tax relief for those who had to suck it up and make a withdrawal from their plans last year?