Try to delay taking required IRA/401(k) distributions

PERSONAL FINANCE

November 04, 2008|By EILEEN AMBROSE | EILEEN AMBROSE,eileen.ambrose@baltsun.com

If you have been putting off taking required distributions this year from an IRA or 401(k) because of the plunging stock market, you might want to wait a little longer.

No, that's not based on a premonition that stocks will make a stunning rebound. Rather, there's support in Congress and by both presidential candidates to suspend mandatory distributions.

Required minimum distributions from a traditional IRA or 401(k) kick in after age 70 1/2 . This is the government's way of finally collecting its due on money that's been sheltered from taxes for possibly decades. Don't take the distribution, and you will be hit with a 50 percent penalty on the amount you were supposed to take out.

How much you must pull out is based on a formula using the value of your account at the end of the previous year. That's the rub. Account values on Dec. 31, 2007, were significantly higher than they are today.

Take your annual distribution now, and you could end up withdrawing more than you would like and be forced to sell investments in a beaten-down market.

This has become a big issue with retirees. Last week, AARP's chief executive wrote to the Treasury secretary asking that distribution requirements be suspended immediately. William D. Novelli noted in his letter that the Dow Jones Wilshire 5000 index last week was down 45 percent from its stock market peak about a year ago.

Not everyone agrees this is the best way to help.

Ed Slott, an IRA expert, says this relief won't help needy seniors who have no choice but to tap their retirement accounts to live on. But it will help the well-off who can afford to leave their IRAs untouched until the market improves, he says.

If the intent is to help those in need, the government should waive the 10 percent early-withdrawal penalty to give relief to those younger than 591/2 who have hit on hard times and need to tap retirement accounts, Slott says.

Joseph DeMattos, AARP's senior state director in Maryland, says that in recent weeks he's been getting calls daily from Marylanders who aren't wealthy but are struggling with mandatory distributions. They also ask where they should put the money that they must take out, he says.

DeMattos argues that retirees need relief from required distributions.

"This is no normal bear market. This is an unprecedented economic event," he says.

Clint Stretch, managing principal of tax policy at Deloitte, expects relief will come after the election, either from the Treasury or Congress.

"My advice to people who are encountering this problem is to wait as long as they can" to take their distribution, he says.

That's what financial adviser Jim Sloan in Texas is telling his clients.

"The clients I have who are supposed to take required minimum distributions are not doing anything just yet," he says. "I'm telling them to stay tuned."

It's unclear at this point, though, if retirees who took their distributions earlier in the year will get any relief.

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