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CCH® PENSION — 03/04/10

CRS reviews proposals for suspending RMDs, easing early withdrawal tax

In response to the economic downturn affecting individuals and retirement plans, the Congressional Research Service (CRS) has prepared a report examining various legislative proposals to suspend the 10% additional tax on certain early withdrawals from retirement accounts, as well as the required minimum distribution (RMD) requirements.

Congressional proposals

Congress has considered providing relief to taxpayers by suspending or eliminating two tax penalties imposed on defined contribution plans and individual retirement accounts (IRAs). First, Congress has proposed suspending the 10% additional tax under Code Sec. 72(t) on early withdrawals from retirement accounts made by individuals under age 59 1/2. Second, Congress has proposed again suspending the RMD requirement that applies to individuals age 70 1/2. Legislation signed by President Bush in December 2008 suspended the RMD for calendar year 2009. For calendar year 2010, RMDs have resumed.

The CRS report detailed reasons for the proposals, including the increased economic hardships faced by U.S. households that may need to use their retirement account funds for current financial emergencies. Additionally, retirement accounts are smaller due to the decline in the stock market. Since RMDs taken in any year are a percent of the account balance at the end of the previous year, many RMDs taken in 2008 were a larger percentage of the account balance on the date of the withdrawal than at the end of 2007.

RMD suspensions for 2010 and beyond

According to the CRS, policymakers have recommended various proposals to eliminate or suspend the RMD requirements. The proposals include:

• Suspending the RMD requirement through 2010;
• Suspending the RMD requirement through 2012;
• Eliminating the RMD requirement; or
• Raising the required starting date, which would raise the age at which individuals must start taking their RMDs.

Early withdrawal tax proposals

Several proposals have been advanced by policymakers to eliminate or suspend the 10% additional tax for early withdrawals in certain situations, according to the CRS report.

The proposals include eliminating or suspending the 10% additional tax for:

• Public safety employees who retire before the age of 55;
• Workers who are unemployed;
• Individuals affected by natural disasters;
• Homeowners at risk of having their mortgage foreclosed;
• Individuals who receive a hardship distribution from a retirement plan; and
• Individuals who have qualified adoption expenses.

Source: "Early Withdrawals and Required Minimum Distributions in Retirement Accounts: Issues for Congress" CRS Report #R40192, January 27, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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