Tax relief for seniors next year, but what about for 2008?

President Bush is expected to sign a bill passed by Congress last week that provides some financial relief for pension funds, as well as tax relief for individuals aged 70 1/2 with money in tax-deferred 401(k) 403(b), IRA and other "qualified" retirement accounts.

According to the bill, if you're 70 1/2, the age at which you typically must start withdrawing from your retirement accounts (and paying federal income tax on those withdrawals), you won't have to make any required minimum distirbutions, or RMDs, in 2009. According to Mark Luscombe, a tax analyst at CCH, a tax information publisher, if you decide to take advantage of that change for 2009, you won't be required to take out more in subsequent years to make up for it. For more on the bill, download this tax briefing (PDF) prepared by CCH.

The point of the legislation is to relieve seniors of the tax burden on their withdrawals in light of the current economic crisis. That's good.

But as it stands, the bill misses the point. It doesn't change the current law stipulating that by the end of 2008, seniors must take RMDs from their retirement accounts based on those retirement accounts' value on Dec. 31, 2007. So to add insult to injury, seniors who saw their investments plunge this year must base this year's RMD on the value of their holdings last year, which may have been significantly higher. And, of course, they'll have to pay regular income tax, not less-costly capital gains tax, on those withdrawals. If the senior takes out less than the RMD, the remainder that should have been withdrawn is taxed at 50 percent.

Congress  left it to the Treasury to decide whether to change the rules regarding RMDs for 2008. But time is running out for the department to help seniors, most of whom already have taken their RMDs. "We are conscious that it’s late in the year and our options are limited, but we’re seeing what’s possible," a Treasury spokesman told us.

How about retroactive tax relief on those RMDs for 2008? That might go a long way toward easing seniors' pain.—Tobie Stanger