Congress approved legislation that would allow retirees to defer withdrawals from their 401(k) plans and individual retirement accounts in 2009 without triggering a penalty. President Bush is expected to sign the bill.

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 Seniors who ignore the requirement face a penalty equal to 50% of the amount they should have withdrawn.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 concern among retirees who have seen the value of their retirement plans shrink dramatically since Dec. 31, 2007. Unlike younger retirees, they do not have the option of postponing their withdrawals until their investments recover.

The legislation won’t help seniors who were hoping to avoid taking a withdrawal in 2008, or have already taken a withdrawal. But it will give seniors more time to recoup some of the losses in their retirement plans.

There’s still a chance that the Treasury could use its regulatory authority to help retirees in 2008. One possibility 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.

Source: USATODAY.com, Personal Finance Section, December 12, 2008 edition