New law allows seniors to delay tapping retirement funds
Some retirees will be granted a bit of a reprieve in 2009 by a bill signed into law last week by President Bush.
During the coming year, seniors age 70½ or older won't be forced to withdraw the required portion of their investment portfolio from 401(k)s or conventional Individual Retirement Accounts as they have in the past.
The advantages of leaving these funds alone in the current financial environment are obvious, according to Scott Hansen, a certified public accountant and partner in the Duluth firm of Kolquist Seitz & Goldman Ltd.
"If you take money out of a fund now, you're essentially harvesting your investment in a down market," he said.
Locking in your losses can be a painful thing to do, particularly during a year like this one, when the stock market is down nearly 40 percent, said Neill Atkins, who operates a Duluth investment firm.
"It's hard to liquidate something when it's down in value and maybe even down from the principal value," he said.
It doesn't help that the Internal Revenue Service calculates required minimum distributions as a percentage of a fund's value on Dec. 31 of the previous year, especially as most portfolios are finishing 2008 in far worse shape than they started it.
"2008 was a great year to buy but a crummy year to sell," said Laura Zahn of Edward Jones Investments.
If 2009 brings continued market turmoil, Zahn believes the waiver of a required minimum distribution could offer a bit of welcome relief.
"Some people have to withdraw money because they need it to cover living expenses. But if you're in the wonderful position where you don't need it, this gives the market a chance to come back," she said.
Zahn said she has some clients who were holding off on taking their required minimum distribution this year in hopes that lawmakers would offer a waiver for 2008, as well. But that didn't happen.
Anyone over 70½ who hasn't yet taken their required minimum distribution should act promptly or risk a fine equivalent to as much as 50 percent of the required distribution, Zahn said.
If possible, retirees should avoid cashing out market-battered equities, drawing instead on more stable fixed investments that are part of any well-diversified retirement portfolio, said Darren Danielson, a wealth adviser for RSM McGladrey Inc. in Duluth.
Even if receiving a required minimum distribution does not involve selling a distressed stock or mutual fund, Danielson said putting it off could be an attractive means to reduce tax bills in 2009. All distributions from 401(k)s and conventional IRAs are taxed as regular income.