Seniors get no break on 2008 required retirement distributions

Seniors won't get a tax break they'd hoped for this year. In spite of punishing stock-market losses, the Treasury Department determined recently that folks over 70 1/2 still must take taxable, required minimum distributions (RMDs) from their traditional IRAs, 401(k)s, and 403(b)s by year-end based on the value of those holdings on Dec. 31, 2007.

Of course, on that date many people's holdings were valued much higher, so the distributions--and the taxes--are likely to be greater than they would be if based on their current value. If you fall into the eligible category and don't take out the full RMD for this year, you face a 50 percent penalty on the amount not withdrawn. (Folks who turned 70 1/2 within 2008 don't have to withdraw their RMDs until April 15, 2009, but the amount still must be based on their holdings on Dec. 31, 2007.)

Congress approved a rule that allows folks over 70 1/2 to forgo all or part of their taxable RMDs in 2009 with no penalty, but that helps no one right now.

Remember, however, that while you must withdraw a set amount, you don't have to cash it out. If you still want to stay invested, you can move your RMD from a tax-deferred account to a taxable brokerage account. You'll still have to pay the tax on the distribution, but you'll be keeping your money in investments with growth potential--fingers crossed.

What is more, Congress extended a rule that allows people 70 1/2 to transfer as much as $100,000 from an IRA to a charity, tax-free, and have the donation count toward their RMD for 2008. The rule also is extended through 2009. This is  a great option if you haven't taken your entire distribution yet and still want to make some charitable contributions for 2008.

Check the IRS's Web site for more details on RMDs and year-end donations.

--Tobie Stanger