Currently, investors can avoid the long-standing 10% penalty imposed for a distribution before age 59 ½ by taking the money as a series of equal payments. Those payments were determined based on the value of the 401(k) plan or IRA balance at the time of the first payment.
If the market drops after the payments begin, many investors complained that the payments effectively drained too much money from their dwindling retirement balance.
Now, according to the IRS, investors can determine their payments based on the their retirement account value as it changes from year to year. If the market drops, the investor can reduce the distributions.
“Taxpayers have worked hard to build their retirement savings. They shouldn’t be penalized when the market is down,” said Pam Olson, assistant secretary for tax policy in a Treasury Department press release. “This change will help many taxpayers to preserve their retirement savings by allowing those individuals to slow their distributions down in the event of unexpected market downturns.”
One industry group applauded the IRS for making the move. “We are gratified at (the Department of) Treasury’s latest move to better protect and preserve retirement savings for millions of our members’ employees,” said Mark Ugoretz, president of the ERISA Industry Committee (ERIC), in a statement.
Under the Protecting America’s Savings Act from Representatives Rob Portman (R-Ohio) and Benjamin Cardin (D- Maryland), retirement investors wouldn’t have to start taking retirement payments until age 75, compared to the current 70 ½ . The bill also excludes $300,000 from RMD requirement.
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