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Financial Education for Everyone

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March 27, 2009

It's no news flash that people who invest in the stock market saw their account values drop significantly in the last six months. For those already retired or fast approaching, the impact was especially painful, since it will be much more difficult for their investments to recover value in time to fund their retirement.

However, there are recent positive developments for retirees looking to save money from an unlikely source: federal income taxes. The government recently made changes to the tax code that can help lower your tax load – and more are likely once details of the economic stimulus package gets ironed out.

No 2009 mandatory retirement plan withdrawals. One of the key benefits of participating in a 401(k), traditional IRA or other retirement plan where you contribute pretax dollars is that your contributions lower your taxable income; plus, your contributions and their investment earnings are allowed to grow tax-free until withdrawn after retirement – a time when most people's income, and therefore, their tax rate, is lower than during working years.

However, to ensure that you eventually do pay taxes on these funds, the IRS mandates that people over the age of 70 ½ must withdraw a minimum amount of their assets and pay taxes on them each year. (Roth IRAs are exempt since their deposits have already been taxed.)

Here's how it works: If you were at least 70 ½ in 2008, your minimum withdrawal for 2008 was calculated based on your account's value on December 31, 2007. Unfortunately, many people's retirement accounts diminished considerably in 2008, so they were forced to take a withdrawal that is a much larger percentage than if it had been based on the account's value at year's end.

Although Congress didn't amend the IRS code in time to suspend these mandatory withdrawals for 2008, it did pass legislation that will allow you to forego 2009 withdrawals if you wish. This means you have the option to leave your account untouched in hopes that the market might improve and you can recover some losses before having to withdraw the money and pay taxes on it.

Direct charitable donations from IRAs. The government also resurrected a popular tax-relief policy that allows people over 70 ½ to donate up to $100,000 to charities from traditional or Roth IRAs without first having to declare the distribution as taxable income and then deducting the donation as a charitable contribution.

This policy, which expires at the end of 2009, particularly benefits people who don't itemize deductions, since they wouldn't otherwise receive a tax deduction for their charitable contributions. It also benefits retirees who want to contribute over 50 percent of their adjusted gross income or who are affected by the high-income phase-out for itemized deductions.

To learn more about these new rules, visit the IRS website (www.irs.gov). Given the complexity of these laws and penalties you might face for miscalculation, you may want to consult a financial planner or tax expert to map out your best strategy and to help calculate your taxes. If they don't already have a planner, visit www.plannersearch.org.

Another good resource for retirees is Visa's free personal financial management site, Practical Money Skills for Life (www.practicalmoneyskills.com/retirement). It contains tips on saving for retirement, estate planning, budgeting calculators and much more.

Nobody likes paying taxes – or watching their savings disappear. You might as well take advantage of tax breaks when they come along.


This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.