New Legislation Offers Limited Relief for Retirement Accounts

Pension relief legislation intended to help seniors and employers suffering losses from the economic crisis cleared Congress on December 11. If President Bush signs it into law as …

Pension relief legislation intended to help seniors and employers suffering losses from the economic crisis cleared Congress on December 11. If President Bush signs it into law as expected, the measure will allow owners of individual retirement accounts (IRAs) and 401(k) plans not to take their minimum required distributions (MRDs) for 2009 and allow unlimited roll-overs from Roth 401(k)s into Roth IRAs.

MRD Relief

Owners of traditional IRA and 401(k) accounts generally are required to begin taking distributions by April 1 of the year after they turn 70 ½. The minimum amount is based on the account value at the end of the previous year, divided by a distribution period based on the account holder’s life expectancy, as prescribed by IRS regulations.

With account balances now at levels far lower than they were on December 31, 2007, many investors fear that if they take the full distribution determined under the IRS rules, their account balances will be reduced when what they need is to increase their retirement assets. Without the opportunity to grow their remaining retirement funds in tax-favored accounts, they are concerned that their assets will be depleted too soon and they won’t have enough money to live on near the end of their lives.

Under the legislation, IRA and 401(k) holders won’t have to take their MRDs for the 2009 calendar year. For distributions required to be made from inherited IRAs by December 31 of the fifth year following the testator’s death, the five-year period is figured without counting calendar year 2009.

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Roth Conversions

For people with retirement assets in Roth 401(k) plans sponsored by an employer or former employer, the legislation allows direct roll-overs into individual Roth without limitation.

Roll-overs from employer-sponsored accounts were authorized for the first time by the Pension Protection Act of 2006. Generally, when money from a tax-deferred plan is rolled over into a Roth account in a Roth conversion, the roll-over amount is counted in income and taxed at the account holder’s ordinary income tax rate. Conversions are allowed only for individuals and couples filing joint returns with modified adjusted gross income below $100,000.

Under the 2008 legislation, roll-overs from Roth accounts in a tax-qualified retirement plan are not subject to the adjusted gross income limit. The measure also clarifies that they don’t need to be included in taxable income for the conversion year.

Limited Relief

The relief bill passed by Congress won’t help people who need to take MRDs before the end of 2008 based on their December 31, 2007 account balances because it is effective only for distributions required to be made for calendar year 2009. Account holders must take the distribution required for 2008 and include the distributed amount in income when figuring their tax bills. Commentators have noted that this doesn’t offer the relief a lot of people who are retired or close to retirement need: a reprieve from making withdrawals from their retirement funds based on balances that were much higher a year ago.

Observers and retirement planning experts say they believe President Bush will sign the measure into law despite its limited effect. That’s because it also offers limited relief to employers with defined-benefit pension plans from measures in the 2006 law that were intended to force employers to fully fund their pension obligations by 2011. The stock market crash has also drastically reduced the pension reserves of both large and small companies, and many employers would be forced to make huge contributions to their plans next year without the relief in the bill.

But employer groups have said the measure offers too little relief and promised that they will be back in January to ask the new Congress for more. It’s likely that consumer advocates will seek retroactive MRD relief at the same time.


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