Penalty Waived for Retirees for Mandatory Withdrawals in 2009

Thousands of older Americans who are legally required to take distributions from their shrinking retirement savings accounts will get a break next year.

President Bush today signed legislation that will temporarily waive the penalty on adults age 70 and a half and older who don’t withdraw their annual minimum required distribution (MRD) from their retirement accounts in 2009.

The law places a one-year moratorium on those penalties for IRAs, 401(k)s and 403(b)s, so that older people aren’t forced to take their withdrawals from savings plans that have incurred dramatic losses.

AARP praised Congress for passing the Worker, Retiree and Employer Recovery Act of 2008, though it pressed lawmakers for a freeze that would be applicable this year as well.

“By making minimum withdrawals from retirement savings accounts optional rather than mandatory for next year, older Americans are poised to hold on to more of their diminished nest eggs,” says AARP Legislative Policy Director David Certner. “Now every older American, who was forced to make a choice between taking a withdrawal that was calculated based on a much higher value in their retirement account or face a high tax penalty, will be eligible for this financial relief.”

Max Baucus, D-Mont., chairman of the Senate Finance Committee, said in a statement that measures in the bill “will allow folks to avoid being saddled with a tax hit that wouldn’t exist under normal market conditions.”

Typically, the penalty for failing to take the annual required distribution is 50 percent on the amount that should have been withdrawn. Account holders would also owe income tax on that withdrawal. So, for example, the penalty for refusing to take a $10,000 distribution is $5,000.

The reason behind the MRD law is that it allows the IRS to collect taxes that were deferred when the money was put into savings. But the decline in financial markets meant that older people had to take withdrawals based on last year’s higher values.

The law allows retirement accounts to recover from market losses for older adults who don’t yet need to tap their investments.

► Calculate whether you can take advantage of the 2009 MRD holiday.