Temporary IRA Distribution Suspension Act
In late 2008, Congress voted to suspend mandatory individual retirement account withdrawals for 2009. The suspension was intended to help IRA owners preserve their investment assets, which were greatly depleted by the stock market crash that occurred in September and October of 2008. Both IRA owners and beneficiaries were exempt from taking mandatory withdrawals.
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Required Minimum Distributions
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The Internal Revenue Service calls mandatory IRA withdrawals "required minimum distributions," or RMDs. To calculate an RMD, an IRA owner divides his account's worth on the previous Dec. 31 by his life expectancy according to IRS tables. The result is the amount the owner must withdraw by the following Dec. 31. Those who are required to take an RMD but fail to do so must pay a 50 percent tax penalty on the amount they should have withdrawn.
Purpose of Mandatory Distributions
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The IRS requires people to take RMDs because IRAs are not meant to shelter investment assets from taxes forever. Eventually, either an IRA's original owner or her beneficiaries must empty the account. People who own tax-deferred IRAs, including traditional, Simplified Employee Pension and SIMPLE IRAs, must begin taking RMDs the year they turn 70 1/2. IRA beneficiaries, including Roth IRA beneficiaries, can take RMDs beginning the year after the account's original owner dies or take withdrawals over five years following the original owner's death.
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Scope of the Suspension
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The 2009 suspension of mandatory withdrawals applied to people who owned tax-deferred IRAs, including traditional, SEP and SIMPLE IRAs, and had reached their required beginning date, the year they turned 70 1/2. The suspension also applied to all IRA beneficiaries, whether they chose to take RMDs or withdrawals over a 5-year period. For the latter, the suspension essentially gave beneficiaries a 6-year period over which to keep an inherited IRA open.
Benefits of Suspension
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By suspending all mandatory distributions for 2009, Congress attempted to protect investors' already-depleted nest eggs from further losses. Had investors been forced to take mandatory withdrawals in 2009, many would have liquidated shares of stocks and mutual funds while these securities were at an all-time low. Suspending mandatory distributions allowed investors to wait a year for the market to rebound before liquidating their IRA assets.
2009 IRA Distributions
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As of 2011, it is no longer possible for investors to undo IRA distributions they took in 2009. In 2009, temporary rules extended the rollover period for 60 days or until Nov. 30, whichever was longer, to allow investors to redeposit withdrawals they took while the suspension was in effect.
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