Some Breathing Room for IRA's
New Law Suspends Withdrawals in 2009. Here's How the Rules Will
By Anne Tergesen
The Wall Street Journal
Friday, December 26, 2008
Retirees who ignore the annual distributions they are required
to take from their individual retirement accounts usually run a
big risk -- in the form of a 50% excise tax on the amount they
should have withdrawn. But not next year.
On Tuesday (12-23-08), President Bush signed legislation that
suspends the rule requiring older Americans to take withdrawals
from tax-deferred retirement accounts, such as traditional IRAs
But there are hitches. The suspension lasts for just one
year, 2009. And while intended to give beaten-down
retirement accounts time to rebound, the new law may also
present confusion, particularly for those just starting to take
"The [existing] rules are confusing enough," says Ed Slott, an
IRA consultant in
N.Y. "Now, more people than ever
are going to get tripped up."
Here are answers to questions about how the new law will affect
taxpayers in 2009 and beyond.
Q: How do the existing rules governing IRA withdrawals
A: Those who contribute to tax-deferred retirement
accounts, such as traditional IRAs and 401(k)s, don't pay income
tax on the money they put into these plans. But
eventually, Uncle Sam requires them to take the money out, and
pay income taxes in the process. "The government gives you
a tax break when you make your contributions. When you
retire and are presumably in a lower tax bracket, it wants the
tax revenue it deferred," Mr. Slott says.
Normally, IRA owners must begin withdrawing money from these
accounts by April 1 of the year after they turn 70½. That
means that someone who turned 70½ in 2008, for example, has
until April 1, 2009, to take his or her first required
distribution. To calculate how much to withdraw, look at
your account balance as of the previous Dec. 31, and then divide
that figure by your remaining life expectancy.
(Life-expectancy data can be found in actuarial tables in IRS
You can always withdraw more. But if you take less, you
will be subject to the 50% penalty. These requirements
also apply to 401(k)s and some other employer-sponsored plans,
but not to defined-benefit pension plans or Roth IRAs. (If
you are still working, you aren't required to take distributions
from your current employer's retirement plan.)
Q: What impact will the new law have?
A: The new law suspends required distributions in
2009. This gives those who can afford to leave their nest
eggs alone a better chance of recovering some of the losses they
sustained this year. Why? "They'll have more dollars
working for them in the event of a stock market rebound," says
Elizabeth Drigotas, a principal at Deloitte Tax.
Unless Congress decides to extend the moratorium on mandatory
distributions, those over age 70½ -- along with those who have
inherited IRAs or 401(k)s -- will be forced to resume taking
withdrawals in 2010.
Q: Do I have to take a withdrawal from my IRA in 2008?
A: Yes. The new law has no impact on 2008.
So, if you are required under existing rules to withdraw funds
in 2008, you still must do so. Again, your withdrawal will
be based on your account balance as of Dec. 31, 2007, and you
will typically pay income taxes on the entire sum.
Some were betting the Treasury Department would act before year
end to change the distribution rules for 2008, or maybe even
extend some form of tax relief to those who have already taken
distributions this year.
But recently, Kevin I. Fromer, assistant secretary for
legislative affairs, wrote in a letter to Congress that "the
Treasury Department and the Internal Revenue Service have
determined that any further change to the required minimum
distribution rules should not be undertaken."
He added: "All individuals who are subject to required
minimum distributions for 2008 should take their distribution
under the existing rules."
Q: If I turned 70½ this year and had planned to take my
first withdrawal by the April 1, 2009 deadline, does the new law
permit me to skip it?
A: No. The law suspends distributions only for 2009.
Although first-timers are allowed to delay 2008's distribution
until April 1, 2009, the withdrawal still counts toward your
obligation for 2008, Mr. Slott says. So, if you turned 70½
in 2008 and decided to wait until April 1, 2009, to make your
first withdrawal, that deadline still applies. To
calculate this distribution, you would use your account balance
as of Dec. 31, 2007.
Q: What if I turn 70½ in 2009?
A: This gets a bit more complicated. In effect, you
will have until Dec. 31, 2010, to take your first withdrawal --
even though the IRS will consider that withdrawal to be your
second distribution. Here's how it works:
Normally, people who reach age 70½ in 2009, and who wait until
April 2010 to take their first withdrawal, would have to take
two distributions in 2010: one for 2009 (their first
distribution) and one for 2010 (their second distribution).
That second distribution would have to be taken by Dec. 31,
The new law suspends distributions for 2009. Thus,
first-timers -- anyone who turns 70½ in 2009 -- won't be
required to make a 2009 withdrawal, which normally could take
place until April 1, 2010. But you will need to make the
2010 withdrawal, and Uncle Sam will consider that officially
your "second" distribution, even though in reality it will be
your first withdrawal. Therefore you'll have to take it by
Dec. 31, 2010. (Put another way: individuals who turn 70½
in 2009 would not be able to wait until April 1, 2011, to take
their first withdrawal.)
Q: Can I still donate money from my IRA to charity
without paying income taxes first?
A: Yes. In the bailout package Congress
enacted in October, lawmakers resurrected a tax break available
to those who make donations from their IRAs to charity in 2008
and 2009. Under the law, individuals age 70½ or older can
donate as much as $100,000 from an IRA to a public charity.
No taxes are due on the withdrawal, and the donation counts
toward a person's required annual withdrawal. Next year, of
course -- with mandatory distributions suspended -- the tactic
loses a bit of its luster. But those who wish to make a
direct donation from an IRA can still do so income-tax free,
says Mr. Slott.
Q: Can I convert some or all of my IRA to a Roth IRA in
A: Yes, provided your adjusted gross income is
$100,000 or less, you'll be eligible to make such a move.
Typically, those taking mandatory distributions from a
traditional IRA aren't allowed to turn around and deposit that
money into a Roth IRA, Mr. Slott says. But in 2009, any
withdrawals can be used to fund a Roth, he says.
Mr. Slott believes now is a good time to convert a regular IRA
to a Roth. Not only are tax rates relatively low, but
asset values are beaten down. As a result, although you'll
have to pay income taxes on any money you withdraw from your
traditional IRA, you are likely to owe less than you would at
any other time, he maintains.
Why bother? Once you convert your account to a Roth and
hold it for at least five years, future withdrawals are
tax-free. Moreover, you won't ever have to take a required
distribution again. Plus, there is little risk of failure:
If your account's value declines after you convert it to a Roth,
you can "recharacterize" the transaction -- by turning the
account back into a regular IRA. As long as you do this by
Oct. 15 of the year following the conversion, this will nullify
the tax bill.
Q: If I inherited an IRA and am taking money out under
a five-year deadline, what should I do in 2009?
A: You can skip your withdrawal in 2009.
Effectively, this will stretch your five-year deadline out by
another year, says Ms. Drigotas of Deloitte.
Write to Anne Tergesen at