Administration September 8, 2002

IRA Required Distribution Bill Leaves Out Qualified Plans

August 9, 2002 (PLANSPONSOR.com) - A move by a New Jersey Congressman to strike a law requiring that Americans start withdrawing money from their Individual Retirement Accounts (IRA) by age 70 ½ won't extend to 401(k) participants.

Reported by

Fred Schneyer

Adding 401(k)s to the bill would simply break the bank – making the hit to Uncle Sam even more onerous than it would be from Republican Jim Saxton’s existing proposal (H.R. 1368), which now just covers required minimum distributions (RMD) from IRAs.

Saxton spokesman Jeff Sagnip said “scoring” a bill also affecting 401(k)s would make it extraordinarily difficult if not impossible to pass. “If you put the two together and try to get it through the (House) Budget Committee, they would look at it as something with a higher cost. It (the cost) would probably be too great, ” Sagnip told PLANSPONSOR.com.

Saxton may well come back to other retirement plans with RMD rules in the future, his spokesman said. “It would be something he would consider,” Sagnip said.

The IRA Bill

Under the current bill, seniors would be able to keep their IRA money invested in the market and put off paying taxes for as long as they wanted. If need be, they could even pass the IRA along to their heirs, if they wanted.

The 70½ age deadline has been unchanged since IRAs were enacted in 1974.

However, with the federal budget back in deficit mode, observers say Congress isn’t likely to give Saxon’s idea a thumbs up since doing so would do away with the tax revenue the RMDs create.

A full elimination of the distribution requirement would simply be too expensive for the government, say groups like the American Benefits Council (ABC), but they support the notion of upping the age.

James Delaplane, ABC vice president for retirement planning, said his group isn’t upset that Saxton left out qualified plans from his bill and recognizes the gargantuan tax impact such a move would have. “We understand (House) members have to set priorities,” Delaplane told PLANSPONSOR.com.

Delaplane predicted that any bill that actually moves through Congress will likely include all retirement plans including 401(k)s, but would focus instead on a less dramatic RMD rule change.

One option the ABC backs is to raise the effective age to allow senior to keep their money a bit longer, but would still eventually require them to face the tax man.

An estimated 34.1 million — nearly one-third — of American households held traditional IRAs last year, worth an estimated $2.4 trillion, or 22% of the total US retirement market, according to the Investment Company Institute, an association of mutual fund companies.