This memo is intended to alert you to the effect of the Worker, Retiree, and Employer Recovery Act of 2008 on the required minimum distribution (RMD) rules.
What are the RMD rules?
Under the RMD rules a taxpayer who is a participant in a qualified retirement plan (401(k), §403(b)) or a non-Roth IRA, and who has reached his required beginning date (RBD), or a taxpayer who is the designated beneficiary of a deceased participant in a qualified retirement plan or an IRA (including both non-Roth and Roth IRAs), is required to withdraw a certain minimum amount annually (“RMD amount”) from such an account, to avoid penalty.
Each RMD amount constitutes taxable income to the taxpayer in the year received. If the taxpayer fails to take the RMD by the due date, an additional 50% penalty is assessed.
What is the New Law?
The Worker, Retiree, and Employer Recovery Act of 2008 provides a one year suspension of the RMD rules for 2009 (the “2009 RMD Waiver”). This means that most taxpayers otherwise required to take a RMD in 2009 can avoid withdrawal in whole or in part, without incurring penalty.
How Does the 2009 RMD Waiver Affect You?
If you reached your RBD on April 1, 2008 or earlier (born before June 30, 1937 or (for certain employer-provided plans) worked past age 70 ½ and retired in 2007 or earlier) you must take an annual RMD amount. Under the 2009 RMD Waiver you do not have to take your 2009 RMD, otherwise due by December 31, 2009.
If you will reach your RBD on April 1, 2009 (born between July 1, 1937 and June 30, 1938 or (for certain employer-provided plans) worked past 70 ½ and retired in 2008) you must still take your first (2008) RMD by April 1, 2009. The 2009 RMD Waiver does not apply because your first RMD is attributable to 2008. However, you do not have to take a further distribution until December 31, 2010. Without the 2009 RMD Waiver, you would have been required to take a second (2009) RMD by December 31, 2009.
If you will reach your RBD on April 1, 2010 (born between July 1, 1938 and June 30, 1939 or (for certain employer provided plans) worked past 70 ½ and retire in 2009), under the 2009 RMD Waiver you can avoid your first (2009) RMD which would otherwise be due by April 1, 2010 (this distribution is considered attributable to 2009). However, you must take your 2010 RMD by the due date of December 31, 2010.
If as a designated beneficiary under an inherited IRA or retirement account you are taking RMDs over a distribution period based on IRS-published life expectancy tables, and you would otherwise be required to take a distribution in 2009, under the 2009 RMD Waiver you do not have to take your 2009 RMD. If the “5-year rule” (the entire account must be distributed no later than December 31st of the fifth year following the year of death) applies to you, the 2009 RMD Waiver operates to ignore calendar 2009, so that essentially it becomes a 6-year rule.
If you have already taken all or a part of your 2009 RMD after January 1, 2009, but wish to avoid recognizing such distribution as taxable income you can contribute the withdrawn funds to a qualified retirement account in accordance with modified 60-day rollover rules. That is, the rollover must be done within 60 days of the distribution; however, because of the 2009 RMD Waiver, the mandatory 20% income tax withholding does not apply.
Who Benefits from the 2009 RMD Waiver?
Any taxpayer who would have been required to take a 2009 RMD, but who does not need the distributions for living expenses will benefit from the 2009 RMD Waiver. Older, wealthier taxpayers with substantial retirement account balances will benefit the most, because the RMD rules would otherwise compel such taxpayers to take large RMDs in 2009.
By avoiding any distribution in 2009, or withdrawing less than the full RMD amount you would otherwise be required to take, you can potentially expect to realize the following benefits:
- You will have less taxable income for 2009;
- You can reduce your 2009 Adjusted Gross Income (AGI), thus possibly avoiding or mitigating the effect of AGI-based phase outs of tax breaks;
- If you were the participant in a retirement plan, you have more tax-sheltered amounts to leave to your beneficiaries;
- If you inherited a retirement account, you can retain more funds within the tax-shelter of the inherited retirement account; and
- You can avoid the sale of beaten down assets in 2009 and (hopefully) see your investments recover before having to sell to make required withdrawals. (Note that there is no need to show that a retirement account is “in distress” because of stock market conditions in order to qualify for the 2009 RMD Waiver. The 2009 RMD Waiver applies equally to all eligible accounts however invested.)