Both the U.S. House of Representatives and the U.S. Senate passed a bill that would waive required minimum distributions (RMD) in 2009. Normally, individuals over the age of 70.5 are required to withdraw an amount calculated by dividing the prior December 31st balance of the retirement account by the individual’s life expectancy as determined by the Internal Revenue Service. The government requires these distributions to ensure that money in retirement accounts is ultimately taxed. Failure to withdraw the required amount subjects the individual to a 50% penalty on the amount that should have been withdrawn in addition to income taxes that should have been paid on withdrawn funds.
For example, an individual who is in the 25% tax bracket who failed to take a $10,000 minimum distribution would face a $5,000 penalty for not taking the withdrawl in addition to $2,500 in income tax for a total penalty of $7,500.
The House and Senate have waived these RMD rules in 2009 to allow retirement accounts that have been drastically reduced due to poor market conditions more time to recover. Requiring individuals to still take RMDs would be forcing retirees to sell their investments at a time when their market value is low.
President Bush has not signed this bill into law, but is expected to do so soon.