Retirees with substantial nest eggs are getting some good news -- but not exactly the news they were hoping for.
President Bush is expected soon to sign into law a bill that would suspend for one year a requirement for many retirees to withdraw a minimum amount from their individual retirement accounts and 401(k) plans. The measure is a response to the plunge in the stock market this year.
But the reprieve applies only to 2009. It doesn't affect the requirement for distributions in 2008.
"We have had an anomaly in the market, and they're trying to reduce the impact of it," said Lynn Dudley, a retirement plan expert with the American Benefits Council in Washington. "But it's not perfect."
The law would also make it possible for more new retirees to get lump-sum payments from traditional pension plans -- but that option still would be less available than it was before the bear market.
Here's a rundown of the expected changes:
Forced withdrawal
If you're over age 70 1/2 , under current rules you're required each year to take a certain percentage of assets out of any tax-deferred retirement account, including traditional IRAs and 401(k) accounts. The percentage depends on your age. The purpose is to make it more likely you'll pay income tax on all the money in your retirement account before you die. (The government helps you save by deferring tax on the income you put aside, but not forever.)
This year retirees have complained that the rule is forcing them to take out too much. That's because the calculation of the required withdrawal amount is based on the value of the account at the end of 2007, before this year's big drop in stock prices.
For example, a 72-year-old whose retirement account's value sank 40% -- to $300,000 today from $500,000 at the end of 2007 -- would have to withdraw $19,531 based on the $500,000 value, compared with a withdrawal of $11,718 based on the current $300,000 value.
And if you don't take out the mandatory amount, you get hit with a tax penalty equal to half of the amount you should have withdrawn but didn't.
Congress and the Treasury Department debated waiving the penalty for 2008 but decided against it because most people had already taken their retirement plan distributions for the year.
Changes for 2009
