Assets owned in an individual's retirement accounts (i.e., 401(k) or profit sharing plan, or an Individual Retirement Account) are not subject to current income taxation until the individual starts receiving payments from these accounts. Therefore, in general, the longer the individual can defer payout from these accounts (and the lower the payout amounts) the longer the individual can defer the payment of current income tax.
Under federal law, however, once an individual reaches age 70 1/2 the individual must start receiving a "minimum required distribution" (MRD) from these accounts by his or her "required beginning date" (defined as April 1 of the year following the year the individual participant turns age 70 1/2). Each year's MRD is determined by dividing the individual participant's prior year account balance by a factor obtained from certain IRS tables. The individual can take out more than the MRD from these accounts, as there is no upper limit on payout—the government will gladly takes its tax dollars early. Annual MRDs must be paid by December 31 of each year.
The Worker, Retiree, and Employer Recovery Act of 2008, signed into law this past December, eliminates the requirement of an MRD for 2009. The question, then, is: should an individual choose not to take an MRD in 2009 from his or her account?
The answer to this question would normally be a no-brainer. You would not take the MRD if you did not immediately need the money because you could defer current income taxation. This year, however, the answer is more complicated.
President Obama, in the Greenbook (May 2009), outlines the administration's 2010 fiscal year tax proposals. It provides that the highest marginal income tax rate will increase to 39.6% in 2010 from its current lower level of 35%. Passage of these proposals is not certain, but it does appear very likely. Therefore, deferral of the individual's MRD in 2009 for those taxpayers with incomes subject to the highest marginal income tax rates might not be such a good idea. These individuals might be better off taking their MRD in 2009 (and possibly taking additional payments as well) to avoid paying a higher rate of income tax on future retirement plan payouts.