Among the options, some have proposed reducing or eliminating the penalties on certain transactions in tax-advantaged retirement accounts. Two proposals have been suggested: (1) suspending the penalty tax for withdrawals from IRAs and DC plans that applies to individuals under the age of 59½; and (2) suspending the penalty tax for not taking Required Minimum Distributions (RMDs) from these plans, which would primarily affect individuals aged 70½ and older. In December 2008, the House and Senate passed H.R. 7327 , which suspends the RMD requirement for calendar year 2009. Early Withdrawal Penalty

		Background

As the worsening economy increases Americans' economic insecurity, individuals may view their retirement accounts as a source of funds to help meet current expenses. Table 2 indicates that 14.6% of households that could borrow from their retirement plan in 2007 had an outstanding loan. Required Minimum Distributions

		Background

Certain account holders are required to withdraw a percentage of their accounts each year, called a Required Minimum Distribution (RMD). In practice, most households hold a large fraction of their retirement accounts in equities. For households whose retirement account balances have lost value because of the decline in the stock market, suspending the tax for failure to take the RMD would allow these households to recoup the losses as the stock market rises faster than if they were required to withdraw the funds. On December 23, 2008, President George W. Bush signed this bill into law ( P.L. 110-458 ). One option would be to allow households to make the RMD based on their account balance at the time of the withdrawal, thus ensuring households that their RMD is not "too large" relative to the account balance at the end of the previous year. A distribution can be based on the account balance on December 31 of the previous year or any date in the current year prior to the first distribution.
In response to the economic downturn, Congress considered providing relief to Americans by suspending two tax penalties on defined contribution retirement plans and Individual Retirement Accounts (IRAs). First, Congress considered allowing individuals to make withdrawals from their retirement accounts without paying a 10% penalty for withdrawals from retirement accounts by individuals under the age of 59½. Second, Congress considered suspending a requirement that most individuals aged 70½ and older withdraw a certain percentage of their retirement account balance each year (known as a Required Minimum Distribution [RMD]). In December 2008, the House and Senate passed H.R. 7327, which suspends the RMD requirement for calendar year 2009. On December 23, 2008, President George W. Bush signed this bill into law (P.L. 110-458). For calendar year 2010, RMDs have resumed.
The reasons for these proposals are that (1) the increased economic insecurity among American households means that households might consider using retirement account funds for current emergency expenses; and (2) since many individuals have at least a portion of their retirement accounts invested in the stock market, the decline in the stock market means that many retirement account balances have seen significant declines. Because the required minimum distribution taken in any year is a percentage 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 on December 31, 2007.
This report discusses the reasons offered in support of suspending these provisions, as well as the drawbacks. This report also presents data that estimates the number of households that these proposals would impact. Borrowing from retirement plans as an alternative to withdrawals is also discussed. Finally, the report discusses the kinds of proposals offered to either suspend or eliminate the early withdrawal penalty or the required minimum distribution provision.
This report will be updated as legislative activity warrants.