How the New Withdrawal Law Will Impact Retirement Accounts

Copyright: Jason Schneider / WSJ

A new law was passed in December to allow retirees to suspend their withdrawals from IRAs in order to shore up their accounts after large 2008 losses. Prior to the legislation’s passion, retirees over 70 and a half years old, as well as those people who had inherited accounts, were mandated to withdrawal a minimum amount each year from their accounts to prohibit investors from staying completely tax-free forever. The rationale for the new law was easy to understand; some retirees would rather keep their money in their accounts rather than sell at the bottom.

A Very Complicated Law

The language in the bill has many investors wondering how and when they can suspend their withdrawals in order to rebuild account balances. At present, the only concrete message is that IRA does fit in the guidelines, and investors will be able to suspend withdrawals for these accounts. However, no further information has been given on the status of this law as it applies to 401ks. At this point in time, it is unknown whether or not 401k programs will even be included.

The 60 Day Rule

Investors who did not know of the rule or want to cancel automatic withdrawals may do so under a provision that allows IRA investors up to 60 days worth of withdrawals to be put back into their accounts. The method is simple; cut a check for the amount you have received in the past 60 days to your IRA custodian, and the balance will be readjusted as if there was never a withdrawal. (Investment returns and interest payments will not be adjusted for the returned money.)

Investors must understand that only one rollover is allowed for each 12 month period. If investors cannot beat the deadline or exceed the number of allowed rollovers, each disbursement will be taxed at the appropriate rate, which is something you'd like to avoid if you weren't planning to withdraw.

Call Your Custodian Now!

All IRA managers are taking different actions when it comes to complying with the new law. Some are suspending payments to retirees who make only the minimum withdrawals, while others are stopping them all-together. Very few are contacting investors to tell them about the change in legislation. Seeing as investors only have 60 days to reinvest any withdrawals, time is certainly of the essence.

The Withdrawal Law Lasts for One Year Only

At the present time, this law was only slated to be in effect for the duration of 2009. Regulations will automatically return to business as usual (mandating minimum withdrawals) starting in 2010. Thus, investors need to clearly outline their plans to their custodians, both for the short and long term, to avoid any future problems when this law expires.

Unintended Consequences

The new law was intended to help both retirees and Wall Street rebound from a terrible year. By removing the minimum withdrawal requirement, legislators were hoping that any excess selling pressure could be removed from Wall Street to help the markets recover.

However, this new law may have unintended consequences, as many savers may find that ending withdrawals is in their best interest – and they may simply stay invested in fixed income opportunities. As of now, fixed income rates are at their lowest, minus junk bonds, and more equity piling into funds may keep them lower for some time to come.

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