The pension relief bill passed by Congress and signed by President Bush in late December suspends required minimum distributions from IRAs, 401(k)s and similar retirement plans this year. This generally applies to people ages 70 1/2 and older.
The Worker, Retiree and Employer Recovery Act of 2008 aims to help retirees by suspending required distributions for 2009, enabling them to not have to withdraw money in a severely depressed market.
Instead, they will be able to leave funds in and allow time for them to rebuild. Reducing the amount of income for retirees also will put some of them below the $100,000 modified adjusted gross income limit that otherwise would have prevented them from converting to Roth IRAs, says James Lange, a CPA and attorney in Pittsburgh who writes about retirement plan topics. Roth IRA contributions are taxed but withdrawals are generally tax-free when the account is at least five years old and the owner is at least 59 1/2. Traditional IRAs contributions aren't taxed, but withdrawals are.
Lange says converting to a Roth IRA now is advantageous because the current depressed market means the investment growth potential is higher. He adds that while Roth IRAs generally benefit younger investors because they can benefit from more years of tax-free growth, a Roth IRA still makes sense for people 70 1/2 and older because they and their spouse, or even the next generation, can benefit from tax-free growth after initial taxes on contributions are paid.
"That can mean tax-free growth for inherited IRAs," Lange says.