Bill would allow retirees to let nest eggs sit in ’09

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if you don’t take out the mandatory amount, you get hit with a tax penalty equal to half of the amount you should have withdrawn but didn’t.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

Instead, legislators approved a hiatus from mandatory distributions in 2009. In other words, if the bill is signed, you could take nothing out of your retirement account next year and not be penalized. Of course, you still would be able to take out any amount you wanted, if that was your preference.

There are a couple of exceptions: If you are receiving regular annuity payments from your retirement plan that began before 2009, you cannot suspend those.

Also, if you delayed taking a 2008 distribution until 2009 -- that’s something you can do the first time you’re required to make a withdrawal -- you will still have to take that 2008 distribution amount in 2009. The bill would let you forgo taking only the 2009 amount.

Lump sums

The bill also would make a number of technical corrections to the Pension Protection Act that could significantly affect those who have traditional pension plans and are laid off or are about to retire.

Current law bars a company from providing lump-sum payouts to retirees and jettisoned employees if the company’s pension plan is underfunded.

If a plan has less than 80% of the assets it needs to pay future retirees, it is barred from giving departing employees 100% of their pension benefits in a lump sum. Instead, they can get at most a partial lump sum, with the rest of their benefits received in the form of annuity payments for life.

If the plan’s funding level falls below 50% of what’s required to pay future retirees, lump sums can’t be given at all.

The legislation wouldn’t change those requirements, but it would change how a company determines how well funded its plan is. Instead of making that determination based on the value of the plan’s assets at the end of 2008 -- the current requirement -- employers would be able to use the average of the plan’s assets over a 24-month period. That would make it less likely that a plan would be considered underfunded.

Nonetheless, the stock market’s decline this year is likely to leave many plans less than 100% funded and subject to restrictions on lump-sum payouts.

Companies are not required to tell their employees whether their funding level is flirting with these restrictions. But if you ask, they aren’t allowed to lie, Dudley said.

So if you have a traditional pension plan and you’re about to retire or think you might be laid off -- and you want to leave with a lump-sum payout -- you can ask your company’s human resources department about the plan’s funding level and whether you would be able to receive a lump sum.

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Kristof is a personal-finance author and syndicated columnist.

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