New Law Suspends IRA Withdrawal Requirements for '09

On Dec. 23, 2008 federal legislation was passed that changed the rules for required minimum distributions from traditional IRAs and 401(k) plans. Taxpayers over 70 1/2 are normally required to make annual withdrawals ( also know as distributions) from IRA accounts. IRAs are funded with untaxed earnings and, are allowed to grow tax deferred until a person reaches the age of 70 1/2.

NO MINIMUM WITHDRAWAL IS REQUIRED FOR 2009 TAX TEAR.

Folks, don't get too excited about this just because the law was passed before the beginning of tax season. If you didn't take your 2008 required minimum distribution, a tax penalty will be imposed. This law will only impact the 2009 tax year, and the return you file in 2010.

The initial purpose for encouraging use IRA accounts with untaxed  earnings, and allowing the account to grow tax deferred, was to have IRAs supplement other retirement income, NOT as a means of passing untaxed income on to heirs. The account holder is required to take the annual distributions of a certain percentage of the account into their income each year after age 70 1/2 . The rates of withdrawal are related to life expectancy tables. If the withdrawal rules are followed, the IRA is withdrawn before death of the taxpayers. Taxpayers who ignore the annual distribution requirement usually face a penalty in the form of a 50 percent excise tax on the amount they failed to properly take. These rules do not apply to defined benefit pension plans and Roth IRAs.

A IRA owner may not need to draw upon an IRA if they have pension income plus social security income, or they may have other savings. The owner may not now want to pay the income tax on withdrawals he does not need. And today, he especially does not want to liquidate investments for an unwanyed distribution in a market that has decreased the value of investments.

As of today, the suspension of IRA withdrawal rules terminates at the end of 2009.  It can be extended into 2010 depending on the state of the economy at the end of this year. 

Remember though, IRA owners may always elect to take distributions if they are willing to pay the taxes on the unearned income and the deferred gain. For those who have little taxable income it may be something to consider.