Penalty-free Withdrawals for Reservists from Retirement Plans to be Allowed

June 23, 2008

President Bush recently signed into law The Heroes Earnings Assistance and Relief Tax Act of 2008, HR 6081. The law contains a provision that would permanently allow penalty-free withdrawals from retirement plans (and subsequent re-contributions to IRAs) for active-duty reservists.

The legislation also permits recipients of military death benefits to roll over the amounts received, tax-free, to a Roth IRA or to an education savings account.

It also imposes a new 30 percent withholding requirement on distributions from qualified and other tax-favored retirement plans, including 401(a), 403(b), SEP, SIMPLE IRA, and nonqualified deferred compensation plans paid by U.S. employers to expatriates.

Tax-free charitable contributions for IRAs extended one-year

An extension of the reservists' provision is also pending in the House-passed H.R. 6049, the Energy and Tax Extenders Act of 2008, but the Heroes Act makes this provision unnecessary. However, the extender bill includes a provision permitting tax-free charitable contributions from IRAs of up to $100,000 per year — for one year.

Action on the extender bill is pending in the Senate but probably won't be considered until later this year.