New Pension Act waives required minimum distributions for calendar year 2009

A recent tax law change promises to help give those of us who are 70 1/2 years old some much needed financial flexibility as we struggle to manage our finances during this difficult economic time. A key provision in the recently passed “Worker, Retiree and Employer Recovery Act of 2008” is designed to help alleviate the financial burden facing seniors who have seen their retirement savings shrink dramatically. The new provision provides relief to seniors by allowing them to continue to keep money in retirement accounts that they are typically required by law to withdraw once they reach age 70 1/2.

As many know, the tax laws generally require individuals with retirement accounts to make required withdrawals based on the size of their account and their age every year after age 70 1/2. This rule is intended to prevent an individual from using retirement accounts as a tax shelter. Any individual who fails to take a required minimum distribution is heavily penalized by the IRS, which taxes the amount not withdrawn at 50%.

The new law suspends the requirement of taking the required minimum distribution from retirement accounts in 2009. This waiver, which is available to everyone regardless of their total retirement account balances, applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts. Suspending the mandatory withdrawal allows retirees to keep the money in their account if they choose, and possibly recover some of their losses as the markets recover.

This is only a summary of this new provision. If you would like to discuss this matter further, please do not hesitate to call.