Congress approved legislation this week that will provide some relief to Americans over 70 1/2 who have suffered significant losses in their IRA accounts.  The bill will temporarily suspend the excise tax that is levied when seniors fail to the the required minimum distribution (RMD) from their retirement accounts.

This penalty is waived for 2009, which means that seniors will not be required to take withdrawals from their tax deferred retirement accounts during 2009, which will hopefully give these accounts time to recover before the 2010 required distribution.  Unfortunately, this law does not apply to 2008 when it would have made the most difference to investors who have lost significant amounts in their accounts.

If you’re not familiar with the RMD, basically taxpayers who are age 70 1/2 must take annual required minimum distributions from their tax-deferred retirement accounts, including traditional IRAs, 401Ks and 403Bs.  The amount is based on your life expectancy and the prior December 31 balance of your account.  Failure to withdraw this amount and you will be levied a 50 percent penalty on the amount that you should have withdrawn… and this is in addition to your regular income tax!

Surprisingly, there is still talk that the RMD for 2008 will be suspended.  If relief is passed for 2008, taxpayers who have already taken their distributions will be allowed to re-contribute those funds so they don’t have to pay taxes on them.  We should know by mid next week if the 2008 RMD is also suspended.