Mandatory IRA, 401(k) withdrawal bad for retirees now

— -- If 50 is the new 30, is 70 the new 50?

Many 70-year-olds believe that it is. They're running marathons, jumping out of airplanes and sending birthday cards to their mothers, who like to remind them that 90 is the new 70.

But no matter how young you feel, once you reach 70½, you're usually required to start taking minimum withdrawals from your individual retirement account or 401(k) plan. The amount of the withdrawal is based on IRS life expectancy tables and the value of your IRA at the end of the previous year.

This year, that's a real problem. Since Dec. 31, 2007, the Dow Jones Wilshire 5000 index, broad index of publicly traded stocks, has declined nearly 36%. That has blown a hole in most retirement portfolios, but younger retirees at least have the option of postponing withdrawals until the market recovers. Retirees who are older than 70½ don't have that choice.

Suppose, for example, that you're 73 years old and your IRA has declined from $100,000 at the end of 2007 to $70,000. According to IRS distribution tables, your life expectancy is 24.7 years. That means you're required to withdraw $4,049 from your IRA this year ($100,000 divided by 24.7), or about 4% of the value of your savings at the end of 2007. Based on your IRA's current value, however, the withdrawal represents 5.8% of your account.

If you're still working at age 70½, you can delay mandatory withdrawals from your employer's 401(k) plan until you retire. But you're still required to take minimum distributions from your IRA and any 401(k) plans you have with previous employers, says Ed Slott, an accountant and IRA expert in Rockville Centre, N.Y.

Ignoring the rule isn't an option. You'll face a fine equal to 50% of the amount you should have withdrawn.

But if you haven't already taken your minimum distribution, wait. Help may be on the way.

If Congress adopts an economic stimulus plan in a lame-duck session this year, there's a "reasonably good possibility" the legislation will include a provision suspending the required distribution rules for 2008, says Clint Stretch, managing principal of tax policy for Deloitte Tax.