Recognizing that many seniors saw their IRA balances hurt by the stock market plunge, Congress has provided some relief by suspending the minimum required distribution (MRD) rules for 2009. This move is designed to help seniors, the ones who can afford to leave their savings alone, a chance to recoup some of their losses when the stock market rebounds. The rules were not easy to understand in the first place, so to make sure you avoid the pitfalls, it’s smart to consult your tax professional soon.

Here’s a summary of how the new law will affect taxpayers:

• Tax-deferred retirement accounts –IRAs, simplified employee pension (SEP) funds and 401(k) s— allow taxpayers to take a tax break during their earning years. The rules also require IRA account holders to take money out, and pay income taxes on these withdrawals, beginning April 1 of the year after they turn 70 ½. The idea is that taxpayers get a tax break when they deposit money into their IRA plans and that, when they pay income taxes on withdrawals after retirement, they will be in a lower tax bracket.
• The new law suspends distributions for 2009. That’s the good news. The bad news is that the rules remain in effect for 2008. If you are slated to make a withdrawal from your IRA during 2008, you must do so. Your withdrawal should be based on your account balance as of December 31st, 2007, and you are expected to pay income tax on the entire amount—even if your IRA balance as of December 31 was much higher than it is now after the stock market decline. This means that in most instances, IRA holders will be obliged to withdraw larger amounts from their respective accounts—larger than they would if the MRD reflected the actual value of their IRA account today—and pay a larger tax hit.
• To calculate your MRD, take the account balance as of the December 31st after you hit 70 ½ and divide that total by your remaining life expectancy. You will find life-expectancy data in IRS publication 590. Be aware that the IRS imposes a 50 percent penalty tax, one of its stiffest penalties, on any shortfall. You can always withdraw more, but you must withdraw the minimum specified amount from any traditional IRA plan you hold. This rule applies to 401(k)s as well - and to some other employer- sponsored plans - but not to Roth IRAs.
• Note that the law –so far—suspends distributions only for 2009. Unless Congress decides to extend the moratorium on MRDs, people over 70 ½ will be required to resume taking withdrawals in 2010. If you turned 70 ½, this year you will have an MRD requirement for 2008. You may elect to defer the 2008 distribution until April 1, 2009.

This overview is not intended to replace the advice of a professional tax consultant. If you have recently hit 70 or will soon, discuss your situation with your tax professional. President-Elect Obama has proposed relaxing hardship withdrawal rules and easing MRD requirements. Once he assumes office, there may be some additional options to consider if these IRA reforms come to pass in early 2009.