Congress OKs bill to help retirees protect savings plans

— -- Congress approved legislation that would provide relief to retirees who want to avoid inflicting further damage on their battered retirement savings plans.

The bill, which President Bush is expected to sign, allows retirees to defer withdrawals from their 401(k) plans and individual retirement accounts in 2009 without triggering a penalty. Separately, it would temporarily ease funding rules for traditional pension plans.

Ordinarily, seniors age 70½ and older are required to withdraw a minimum amount from their tax-deferred retirement savings plans every year and pay taxes on the money. The amount is based on a life expectancy factor calculated by the IRS and the value of their retirement plans at the end of the previous year. Seniors who ignore the requirement face a penalty equal to 50% of the amount they should have withdrawn.

This year, the rule has created considerable angst among retirees who have seen the value of their retirement plans shrink dramatically since Dec. 31, 2007. Unlike younger retirees, they don't have the option of postponing their withdrawals until their investments recover. Many have postponed taking minimum withdrawals in hopes that Congress or the Treasury Department will provide some relief.

The legislation won't help seniors who were hoping to avoid taking a withdrawal this year, or have already taken a withdrawal. But it will give seniors more time to recoup some of the losses in their retirement plans, says David Certner, legislative policy director of the AARP.

There's still a chance that the Treasury could use its regulatory authority to help retirees this year, says Clint Stretch, managing principal of tax policy for Deloitte Tax. One possibility, he says, is that the Treasury could allow retirees to calculate their withdrawals based on the value of their IRAs at the end of 2008, instead of the end of 2007. For most seniors, that would result in smaller withdrawals.

The Treasury is studying its regulatory options, spokesman Andrew DeSouza said in an e-mail.