Transcripts

Kevin McCormally's Tax Tips-IRA Required Minimum Distributions

SUSIE GHARIB: As we head toward the end of the year, now is the time to start preparing your 2008 taxes. Here to help all this week is our tax guru, Kevin McCormally. He's editorial director at Kiplinger's personal finance. Kevin kicks off our year-end tax tips with a controversial issue that's yet to be decided: IRA required minimum distributions.

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Usually, year-end tax tips focus on something you should do right away. Tonight I want to talk about something you should drag your feet on, taking the required minimum distribution from your IRA. Now, this applies only to people age 70 1/2 or older, but if you're too young to worry about it, listen up for your parents or grandparents sake. Once you reach age 70 1/2, the law demands that you take a minimum amount out of your IRA each year, so the IRS can tax it. This year's minimum is based on your age and the amount in the account at the end of 2007. And that's the problem. The market meltdown between then and now has devastated many IRAs. Forcing retirees to dip into shrinking accounts to satisfy the minimum payout rule would further cut into their nest eggs. Now, a lot of people, including the president-elect, think a better idea would be to temporarily suspend the minimum payout rule and let folks who don't need the money skip this year's distribution. The hope, of course, is that a market recovery will allow the balances to grow, which would be good for both retirees, who would have more money and the IRS, because it would ultimately have more money to tax. It is unclear whether the Treasury has the authority to suspend the required payout rule on its own or whether Congress needs to weigh in. In any event, we'll know very soon whether a change will be made. And that's why I advise cooling your heels if you're about to make a withdrawal. Sure, there's a nasty 50 percent penalty for failing to withdraw the required amount. But there's no penalty for waiting a few more weeks to see if the requirement will be waived. If not, you'll have time to make your withdrawal. And if it is, you'll benefit by leaving more money in your IRA to enjoy tax-free compounding. I'm Kevin McCormally.

GHARIB: And one final note about required minimum distributions. They are on our viewers' minds. Last week Harriet Johnson Brackey's "Money File" tackled the subject. She called plans to suspend the RMD a bad idea and that provoked a flood of email from people who disagreed. So, she clarified her thoughts in an entry on our blog. Log onto our web site to read it.

KANGAS: Also on our website, you can submit your tax questions to Kevin McCormally and learn more about the stories in tonight's broadcast. Go to NIGHTLY BUSINESS REPORT on pbs.org and look for the tax tips logo on our home page. You can also email us at nbr@pbs.org