Plans to ease withdrawal rules draw criticism

Proposals are not well-suited for people in financial need, advisers say

Oct 19, 2008 @ 12:01 am

By Sara Hansard

Proposals swirling around Washington that would relax minimum-distribution rules for retirement plans are drawing a skeptical response from advisers.

"It becomes a tax break for people who don't need it," said Jeffrey Kostis, president of JK Financial Planning Inc., a Vernon Hills, Ill., advisory firm.

"Withdrawal amounts are not that huge unless you have seven-digit IRAs," said Mr. Kostis, who does hourly financial planning and does not manage assets.

Republican presidential nominee John McCain has called on the Department of the Treasury to suspend Internal Revenue Service rules that require an estimated 4.5 million individual retirement account holders to start withdrawing their funds and paying tax on the withdrawals at age 701/2 or be fined a 50% penalty. Under the McCain plan, the tax penalty would be suspended in 2008 and 2009, and taxes would be deferred until assets such as stock were sold.

Democratic nominee Barack Obama has called for allowing people to withdraw up to 15% of their retirement funds, to a maximum of $10,000, without paying the 10% tax penalty for early withdrawals this year or next. Income taxes would have to be paid on the withdrawals.

In addition to the candidates' proposals, House Education and Labor Committee Chairman George Miller and Rep. Robert Andrews, D-N.J., have called for the Treasury Department to suspend tax penalties for those not taking their required minimum distributions. The congressmen also plan to push legislation that would exempt seniors who had up to $200,000 in retirement ac-counts from mandatory minimum distributions.

"You're in a distressed situation right now," Mr. Andrews said. "Compelling someone to make a sale when it's not in their best interest is not fair."

But many advisers say the proposals are not well-suited for people who are in financial need.

"It sounds good," said Jeremy Portnoff, president and chief compliance officer of Portnoff Financial LLC, a Westfield, N.J.-based advisory firm that manages about $3 million. "Everybody is going to say, 'That's great; they're trying to help seniors,'" he said.

However, the proposals to suspend minimum-distribution penalties help primarily "those seniors who don't need to take the money," Mr. Portnoff said. "Allowing them to postpone [taking a distribution is] great for the wealthy. For the people who need to be drawing off of their retirement accounts, that's what they're doing already. Suspending the rules makes no difference."

Mr. Obama's proposal is also a bad idea, he said. "It just makes it that much easier for people to tap these accounts. The penalty is there to discourage people from taking early distributions from their retirement accounts. It will probably negatively impact them more in the future," Mr. Portnoff said.

"I want that money to be taxed on principle," said Morris Armstrong, referring to the proposals to suspend penalties for not taking required minimum distributions.

"They're trying to appeal to older people by reducing taxable income," said Mr. Armstrong, owner of Armstrong Financial Strategies, an advisory firm in Danbury, Conn., that manages about $10 million. "The government needs taxes. It's not like we're running huge surpluses."

The situation for retirement account withdrawals is also being misrepresented, said Ed Slott, a certified public accountant and president of an eponymous firm in Rockville Centre, N.Y., that trains advisers on IRA rules.

"They're scaring a lot of seniors, saying: "If we don't suspend the rules, you're going to be forced to sell your stock," said Mr. Slott, who also is an InvestmentNews columnist.

"That's absolutely not true. You don't have to sell your stocks just because you are subject to required minimum withdrawals," he said. Holders of IRAs and 401(k)s who come under the minimum-required-distribution requirements are free to take cash, or stock could be withdrawn and not sold as long as taxes are paid on its value, Mr. Slott said.

Some advisers welcome the prospect of relaxing required withdrawals from retirement accounts. "I could not agree with that more," said Marc Schindler, a partner in Pivot Point Advisors LLC, a Bellaire, Texas, advisory firm that manages about $25 million.

"If somebody has the wherewithal to pull money out of a regular account as opposed to an IRA, I think that's wonderful," he said.

"People will be delighted," said Marcy Schilling, principal of Schilling Group Advisors LLC in Dresher, Penn., which manages $10 million.

Many people have enough income to live on from pensions, Social Security and other savings and investments, she said. "So many people would like very much to spend as little as possible and leave it for their children," Ms. Schilling said.

The Securities Industry and Financial Markets Association of New York and Washington supports allowing delayed distributions, SIFMA spokesman Travis Larson wrote in an e-mail. "Given the changes in life expectancy, it makes more sense to update and delay the age of the required minimum distribution, which hasn't changed since 1974," he wrote.

Proposals to change the retirement account withdrawal system have been considered over the past decade, but they could never get off the ground because of their expense, said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401k Council of America, a Chicago-based organization that represents employers who offer defined contribution plans. Estimates of the cost of the new proposals were not available.

Mr. Ferrigno expects to see similar proposals included in any economic-stimulus package that congressional Democrats are talking about enacting after the election. "The bottom line is, it's bad retirement policy," he said of required distributions. "It's tax policy."

E-mail Sara Hansard at


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


WisdomTree's Maute: Developing elegant tech-enabled solutions

Advisers need unique technology-enabled solutions in order to have more time to expand their practice, according to WisdomTree's Alisa Maute. What can be done today to create a more thriving business of tomorrow.

Latest news & opinion

Nontraded REITs to post worst sales since 2002

The industry is on track to raise just $4.4 billion, well off the $19.6 billion it raised just four years ago, as new regulations hinder sales.

Broker protocol for recruiting a boon for clients

New research finds advisers whose firms have joined the agreement take better care of customers.

Meet our 2017 Women to Watch

Introducing 20 female financial advisers and industry executives who are distinguished leaders, advancing the business of providing advice through their creativity and hard work.

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print