You've had plenty to worry about lately. Rising unemployment, soaring mortgage rates, and stock portfolios that are just beginning to recover from huge losses in 2008 -- all of those things have weighed on everyone's confidence in the economy and their own financial stability.
But even if you can't solve all your problems in one fell swoop, there's one detail that no one has to worry about in 2009: being forced to tap your hard-hit retirement accounts for minimum distributions. In an effort to stop from adding insult to injury, the government has temporarily suspended the rules requiring certain people to take required minimum distributions (RMDs) from their traditional IRAs and 401(k)s.
How the rules work
Ordinarily, you'd have to take RMDs in a number of situations:
- If you were age 70 1/2 or older during 2009.
- If you were the beneficiary of an inherited retirement account that you didn't (or weren't eligible to) roll over into your own IRA.
The amount you'd have to take varies according to a number of factors, primarily your age. For instance, a 75-year-old would have to withdraw about $44 for every $1,000 held in retirement accounts. A 90-year-old, on the other hand, would be forced to take an RMD roughly twice that size, because the life expectancy for a 90-year-old is about half that for a 75-year-old. Meanwhile, a 50-year-old beneficiary who just inherited an IRA would have to take just under $30 per $1,000.
Because RMDs have been suspended, however, you can basically skip whatever amount you'd have to withdraw in 2009. That opens up some opportunities that haven't been available to those taking RMDs in the past.
Why the change?
The government suspended RMDs primarily because of the impact the bear market has had on retirement savings generally. Last year, many people faced a major problem: having seen their retirement account balances shrink dramatically throughout 2008, they had to go against every piece of financial advice they'd heard by selling shares low in order to raise money in their IRAs and 401(k)s to meet the RMD rules.
Even worse, because the required amounts were based on their higher account balances at the end of 2007, they looked even larger in comparison to their shrunken net worth. And of course, because taking withdrawals from traditional IRAs results in taxable income, each of these RMDs forced accountholders to pay more in income taxes.
What to do now
The suspension of the RMD rules currently runs only through the end of the year, although the government has reportedly considered extending the provision through 2010. Regardless of how long the suspension lasts, however, it opens up some new options for investing those retirement accounts:
- Tone down the dividend risk. Many retirees who don't really need support from their retirement accounts turn to dividend-paying stocks to generate the cash necessary to cover RMDs without selling stock. But with big dividend payers like Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), and General Electric (NYSE:GE) having cut their dividends, you may have felt pressure to move on to less reliable high-yield stocks like Calumet Specialty Products (NASDAQ:CLMT). Without an RMD requirement, you don't have worry about cash this year -- so you don't have to take chances on questionable dividend stocks.
- Diversify to non-payers. Similarly, if you've had to worry about liquidity, stocks that don't pay dividends, such as Cisco Systems (NASDAQ:CSCO), Apple (NASDAQ:AAPL), and Research In Motion (NASDAQ:RIMM), may not have appealed to you. Now, though, if growth stocks that tend to plow free cash back into their business rather than paying dividends appeal to you, then you can afford a bigger helping of such stocks without worrying about RMDs.
Not having to deal with RMDs won't help solve all your money problems by a long shot. But it will be one less thing to worry about -- and with everything going on right now, even marking a little thing off your list of worries is a big achievement.
For more on investing for retirement and beyond, read about:
- The real crash is coming.
- Why you need $1 million to retire.
- These stocks belong in your portfolio.
