Retirees Benefit From 2009 Distribution Exemption

Hundreds of thousands of retirees have more money in their accounts thanks to a one-time waiver of a government required withdrawal that kicks in after age 70.

Investment advisers say it's saved tens of thousands of dollars for many by allowing them to keep their money invested as the stock market began to recoup some of its losses.

A law passed last year temporarily lifted the mandated withdrawals, called required minimum distributions, for those who are 70 1/2 this year or older. The aim was to prevent retirees from being forced to withdraw money from accounts hit hard by falling stock values.

"It turned out to be an extraordinarily helpful thing the government did," said Steven Schwartz, a financial adviser and founder of Wealth Design Services in Rochester, N.Y. "It really saved a lot of people a lot of money."

DEFINING THE RMD

The RMD is a federal rule designed to ensure the government, at some point, is able to tax retirement account funds, which have been growing tax free.

It applies to IRAs and employer sponsored retirement plans including 401(k)s and profit sharing plans. Roth IRAs are not included because contributions to these accounts have already been taxed.

Retirees, who might not otherwise take money from their accounts for living expenses, at 70 1/2 must begin taking a specified amount of money out to pay taxes on their untaxed holdings. Failure to do so results in a 50 percent penalty on the amount that should have withdrawn.

The required distributions are calculated based on the account balance and the life expectancy of the account holder as determined by IRS actuary tables.

Numerous Web sites offer RMD calculators. The Financial Industry Regulatory Authority offers a simple one at: http://apps.finra.org/Calcs/1/RMD

WHAT THE ONE-YEAR WAIVER MEANS

President Bush signed the Worker, Retiree and Employer Recovery Act in December 2008, which waived the RMD for this year only. That was at the height of the financial crisis as the stock market plummeted in response to bank failures and broader economic worries.