Retirement savers won't have to take mandatory withdrawals from their tax-deferred accounts next year, and the reprieve creates some opportunities for financial planning, some experts say.
This month, President George W. Bush signed a law that suspends required distributions from 401(k) plans and individual retirement accounts in 2009. The move was an attempt to ease some of the pain caused by this year's stock market meltdown for those subject to required minimum distributions, generally people beyond age 70 1/2 or holders of certain inherited IRAs.
Each year's required distribution is based on the account holder's age and year-end balance from the previous year. With 2008 account balances typically far below 2007 levels, distributions for this year will take a larger bite out of the accounts on a percentage basis and force some account holders to liquidate investments in a down market.
Of course, people who need more than the minimum distributions to cover living expenses will make their withdrawals as usual.
But for people who don't need to tap their retirement accounts, they will be able to forgo taking distributions in 2009.
If you've been waiting to take a distribution in hopes of a reprieve for this year, you'll need to scramble to notify your workplace plan or the company holding your IRA. At most companies, the settlement process for selling securities and moving them to a taxable account can take a few days, so call tomorrow if you haven't already.
If you turned 70 1/2 in 2008 and are taking your first required distribution, you have until April 1 to take your distribution. But the new suspension does not apply to that deadline because the required minimum distributions would be considered for 2008.
And there is an issue surrounding the relief from taking distributions. Taking distributions now allows you to get income taxes out of the way while your investments are at depressed levels. You would lose the tax deferral going forward, but if you hold onto the money for some time, when you sell, you also would pay the presumably lower capital gains rates on that money than the ordinary income rates if you had left it in your retirement account.
Say you turned 70 1/2 in 2008 but didn't feel like selling stocks at such low levels. You could wait until April 1, but if the market moves up, allowing you to have to withdraw fewer shares, you still would be paying the same amount of income tax.
"I think this is a tremendous opportunity," said James Lange, a Pittsburgh estate-planning attorney and accountant who specializes in IRA planning.
Although some investors are better off deferring taxes as long as possible, others would come out ahead by getting some taxes out of the way now and taking advantage of Roth IRAs, which are funded with after-tax money but offer tax-free withdrawals, he said.
Plan to make the most of this year's distributions, next year's reprieve and the lifting of income restrictions on Roth IRA conversions in 2010, experts said.
For 2008, if you are loath to sell depressed funds, look into whether the firm holding your account allows in-kind distributions, which would allow you to pay the taxes owed on the distribution from other funds and simply roll the funds into a taxable account, said Ed Slott, an accountant and IRA specialist.
Fidelity and T. Rowe Price allow such distributions, but you will want to call the companies and work with a representative to arrange the transfer. Vanguard and TIAA-CREF don't allow such transfers, and the rules vary among other firms.
Even if your firm doesn't allow a direct transfer, you could simply sell the shares and repurchase them in a taxable account, though you would need to watch for any redemption fees on the old funds or sales charges on the new ones.
For next year, with no required minimum distribution, funds you withdraw could be converted to a Roth IRA, Lange notes. Required minimum distributions can't be used to fund a Roth. Earned-income rules would still apply for conversions in 2009.
Then the following year, taxpayers at any income level can begin converting tax-deferred accounts to Roth IRAs, he said.
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