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January 26, 1998 12:00 AM

STUDY: NEST EGGS SHOULD SIT LONGER

Vineeta Anand
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    WASHINGTON - Tax rules that force older Americans to begin emptying their nest eggs when they cross 70 no longer make sense and should be scrapped, according to a study that is being taken seriously by legislators in Washington.

    Rep. Jim Saxton, R-N.J., has introduced legislation to repeal the rules; and Sen. Bob Graham, D-Fla., also is said to be interested in scrapping them.

    The study was done by Mark J. Warshawsky, director of strategic research at the Teachers Insurance and Annuity Association - College Retirement Equities Fund, New York. It points out the requirement, known as minimum distribution rules, was put into place more than three decades ago out of concern that wealthy Americans might be stashing their cash in tax-favored retirement accounts without ever taking it out, as a means of avoiding estate taxes.

    Several contortions of the tax law since 1962 have made that concern invalid, Mr. Warshawsky points out in his study. For example, the non-discrimination rules enacted in 1986 severely limit the retirement benefits companies can provide highly paid employees. The rules are aimed at ensuring employers don't provide proportionately higher retirement benefits for senior and middle management over rank-and-file workers.

    Moreover, the rules originally were aimed at men, who dominated the work force. The life expectancy for the average 30-year-old man back then was around 70.

    In 2000, the Social Security Administration expects the average life expectancy of a 30-year-old man will be close to 75, and of the average 30-year-old woman, more than 80.

    Also, the rules originally were put into place for Keogh retirement plans for the self-employed, and were extended to cover all retirement plans in 1986. "Now the entire landscape has changed dramatically," Mr. Warshawsky said. "People have to plan their retirement on their own, and these requirements impede flexible planning."

    Under the rules, the surviving spouse has to keep withdrawing money from the deceased's retirement accounts even if the survivor is considerably younger and would rather keep the money in tax-favored retirement accounts.

    "It seems unfair that a spouse who has survived the plan participant (who himself did not yet receive distributions from the plan) must start getting payments no later than the date the participant would have turned 701/2, regardless of the surviving spouse's age," the study noted.

    And that is the reason lawmakers might be interested in changing the rules, said Lynn Dudley, director of retirement at the Association of Private Pension and Welfare Plans, a Washington trade group representing large companies, which intends to lobby lawmakers to loosen the rule.

    Moreover, failure to withdraw the stipulated amount of money from retirement plans each year can trigger a 50% penalty on the difference between the specified level and the amount of money actually pulled out.

    The rule, said Randolf H. Hardock, partner at the Washington law firm of Davis & Harman, "is like a monster."

    To add injury to insult, the rule also applies to older Americans who have less money saved than they should, and need to keep all the money they can in tax-favored accounts for as long as they can.

    "People who take the money out will tend to spend it," Mr. Warshawsky observed.

    Then, too, the rule had "the somewhat ridiculous requirement that older working people must receive distributions from their current job pensions at the same time contributions are being made on their behalf," the study noted. While that was changed in 1996 so older working Americans must no longer start pulling money out of their retirement plans, "statements from IRS officials indicate that distributions from pensions earned at prior jobs must be made to those still working past 70," according to the study.

    Short of simply getting rid of the rules, Mr. Warshawsky suggests raising the age at which older Americans must start pulling out money from their retirement accounts, and he suggests the Internal Revenue Service use updated life expectancy tables to figure out how long Americans are expected to live. The IRS still is using mortality tables from 1983.

    Mr. Warshawsky suggests raising the life expectancy for a single person to 95 under one method of calculation and 100 for a couple (a joint life expectancy, based on the probability that one of the two will survive).

    The Association of Private Pension and Welfare Plans suggests raising to 75 the age at which Americans must start dipping into their nest eggs, exempting those with small account balances from the rule.

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