Seniors Can Skip IRA Withdrawals This Year - or Roll One Back

By Sandra Block

Every year around this time, millions of seniors take money out of their individual retirement accounts, even if they don't need it to pay the bills.

They do this because IRA owners who are 70 1/2 or older are ordinarily required to withdraw a minimum amount from their IRAs every year or face stiff penalties. Many seniors who don't rely on their IRAs to pay living expenses use the money to buy holiday gifts. But if your kids insist they don't need another sweater, cross "IRA withdrawal" off your to-do list.

Late last year, Congress approved legislation that waived the minimum withdrawal requirement for 2009. Unfortunately, the relief came too late for seniors who were hoping to avoid taking a withdrawal in 2008. Many IRAs plummeted in value last year.

Still, deferring a withdrawal in 2009 will enable your IRA to continue to benefit from this year's stock market rebound. And skipping a distribution means you'll have less taxable income when you file your taxes next year.

A second chance

If you took a withdrawal this year because you didn't know about the rule change, don't despair. The IRS recently issued a ruling that allows seniors who have already taken a withdrawal to change their minds, says Gail Buckner, retirement and financial planning specialist at Franklin Templeton. If you took a withdrawal from an IRA or 401(k) plan this year, you can roll the money back into a retirement account, Buckner says.

The deadline for the rollover is Nov. 30 or 60 days after you receive your withdrawal, whichever is later. Contact your retirement plan administrator for instructions on how to return a withdrawal, Buckner says.

There are a couple of exceptions to this rule:

*You can redeposit only one withdrawal. Some seniors have their IRA providers send them a check every month. If you have that kind of arrangement, you'll be permitted to return only one month's payment, says Barry Picker, an accountant and financial planner in Brooklyn, N.Y. That's because the IRS allows only one IRA rollover a year, he says. The rule doesn't apply to 401(k) plans, Picker says. If you're taking withdrawals from a former employer's plan, you can do multiple rollovers.

*The rule doesn't apply to some inherited IRAs. There are two types of people who are required to withdraw money from their IRAs every year: IRA owners who are 70 1/2 or older, and individuals who inherit an IRA from someone other than their spouse. To avoid a big tax bill, the second group must withdraw a minimum amount every year, based on their life expectancy, even if they aren't yet 70 1/2. (Spouses can roll over inherited IRAs to their own IRAs, after which the regular rules for IRA distributions apply.)

These "non-spouse" beneficiaries are also allowed to skip a withdrawal this year, Buckner says, but they're not allowed to do rollovers. If you took a distribution from an inherited IRA this year, you can't put the money back, she says.

Advice for anxious seniors

Some seniors who are unnerved by recent market volatility may be tempted to take a withdrawal anyway and stash the money in a certificate of deposit or other low-risk account. But if you don't need the money, there's no reason to take a withdrawal this year, says Mark Joseph, a financial planner in Reston, Va. Here's a better idea, he says: Move the money into low-risk investments within your IRA. You won't earn much, but the interest you earn will continue to grow, tax-deferred.

Another option: Make a direct contribution from your IRA to charity. A tax break that's scheduled to expire this year allows seniors who are 70 1/2 or older to take tax-free withdrawals from their IRAs, as long as the money goes directly to charity.

In the past, one of the biggest advantages to this tax break was that the contribution counted against your minimum withdrawal requirement. That's not relevant this year. Still, seniors who are planning to donate to charity should consider making the contribution from their IRAs, Buckner says. You won't be allowed to deduct the contribution, but your withdrawal won't be included in your taxable income.

Because the tax break is set to expire this year, Buckner says, consider making your 2010 contributions before Dec. 31.

To suggest columns, e-mail: sblock@usatoday.com. Follow on Twitter: www.twitter.com/sandyblock. (c) Copyright 2009 USA TODAY, a division of Gannett Co. Inc.

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