Required Minimum Distributions Are Waived For 2009

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Required Minimum Distributions Are Waived For 2009

By Ken Bloom, J.D., LLM &
Jonathan Goldberg, J.D., CPA

In the past, participants in "qualified retirement plans" and individual retirement accounts and annuities (IRAs) were generally required to begin taking distributions from these plans no later than April 1 of the year after they obtain age 70 1/2 (the "required beginning date"). This is known as the required minimum distribution (RMD) rules.

However, on December 23, 2008, President Bush signed into the law the "Worker, Retiree and Employer Recovery Act of 2008". As a result of this Act, the RMD rules are waived for 2009.

The 2009 RMD waiver extends to IRAs, SEP-IRAs, SIMPLE IRAs, 401(k)s and defined contribution retirement plans. However, the RMD rules will be applied starting in 2010, unless the Congress decides to pass an additional waiver.

The tax suspension of RMDs for 2009 helps retired taxpayers who do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from the qualified plan accounts and/or IRAs, individuals will wind up with less taxable income for 2009. Taxpayers may also have more tax-sheltered amounts to leave to their beneficiaries.

A beneficiary of an inherited retirement plan account or IRA must also take the minimum annual withdrawal. However, the new law allows these beneficiaries to also skip the annual payout that would otherwise be required for 2009.

Those retired taxpayers who are well on in years will stand to benefit the most, because their (short) table-life expectancy factors would otherwise compel them to take large RMD payouts for 2009.

There are also some additional advantages that this waiver allows individuals that are not tax related. For example, taxpayers who have retirement funds invested in beaten down assets, and can afford to wait will have an opportunity to (hopefully) watch their investments recover before having to sell assets in order to make withdrawals.

The Act's suspension of RMDs for 2009 means nothing to the many taxpayers who must make regular withdrawals (sometimes in excess of RMD) from the retirement plan accounts and IRAs in order to get by each month. For the past year or so, those with a substantial portion of their retirement funds invested in stocks or mutual funds have been forced to take payouts from constantly dwindling account balances.

If an individual reached age 70 1/2 in 2008 and delayed a payment until 2009, the taxpayer must make the distribution by April 1, 2009 as this relates to the 2008 tax year. However, it will not be necessary to take an RMD for 2009. However, if you are currently in a low tax bracket this year, but expect your income next year to be larger, putting you in a higher tax bracket, it could make sense to withdraw money this year and pay at the lower rate.

Due to the change in the law for 2009, if an individual does not need the RMD for his or her living needs, a withdrawal from a qualified plan or IRA and converting it into a Roth IRA may be beneficial. As long as certain requirements are met a withdrawal from a Roth IRA will be tax-free. Depending on one's circumstances a withdrawal and conversion into a Roth IRA may make financial sense.

If you are unsure whether you will need to withdraw money from your IRA this year, it may make sense to wait until the end of 2009 to make your decision or to see if the stock market is doing better and you may have other non-IRA assets that you can draw from to meet your needs. As always, it is best to consult with your tax professional to help you make a decision regarding your RMD that is best for your particular situation.

If you are considering incorporating, the experts at Bloom, Bloom & Associates can help you determine which method is right for you. For more information about incorporating, or to schedule an appointment to discuss incorporating in more detail, contact Jonathan Goldberg at 248-932-5200.