The economy is in the tank! We’ve already had one stimulus package this year to try and get the economy moving. There is talk about the need for a second stimulus package to loosen the economic logjam. I have a suggestion for a stimulus package that can help both senior citizens and the economy.

     Under current law, senior citizens who reach the age of 70-1/2 must take a Minimum Required Distribution (MRD) each year from their 401 and IRA accounts. In doing so, their distributions are taxed by the federal government at ordinary income tax rates. The current economic downturn has created a major problem for these senior citizens. The amount of money that must be withdrawn is computed on the value of their retirement account as of December 31 of the previous year. This year that means the amount of the withdrawal is based upon the value of their account as of December 31, 2007. Today, much of the value of their account has disappeared.

     Let’s consider the following hypothetical example. As of December 31, 2007, the value of the retirement account was $500,000. Further, let’s assume that by December 31, 2008, the value of the account had fallen to $250,000, a 50% drop. We will assume that the retiree is 76 years of age and that his income places him in the 25% tax bracket. From IRS tables, our 76 year old retiree has a projected life expectancy of 22 years and therefore must withdraw 1/22 of his retirement savings this year, or $22,727 and with a 25% tax bracket he must pay $5,682 in federal income taxes. In 2008, our retiree’s savings will have decreased from $500,000 to $244,318

     In a “normal” year, our retiree might have seen his $500,000 earn him some 5% in dividends and interest, or $25,000, and, after paying $5,682 in taxes on his MRD, his savings at the end of 2008 would have been $519,318. Our Senior Citizen has thus been hit twice, once for $250,000 by the economic downturn and a second time for $5,682 by being taxed on the basis of savings that he now no longer has.

     What I am proposing is that the federal government declare a temporary moratorium on taxing the MRD. In the example given above, our retiree would have an extra $5,682 to pump into the economy which would constitute a stimulus package for senior citizens. How about it Mr. President and members of Congress?