2009 Required Minimum Distribution Relief |
 |
Millions of Americans have seen the values of their retirement accounts shrink as investment markets teeter in response to the economic crisis. Especially hard hit are retirees who have taken withdrawals from their accounts, since liquidating investments to fund withdrawals can mean turning paper losses into real losses that may never be recovered.
New Law
The Worker, Retiree, and Employer Recovery Act of 2008, enacted in December, provides a measure of relief by temporarily waiving “required minimum distributions” (RMDs) from tax-deferred retirement accounts — including 401(k)s, 403(b) tax-sheltered annuities, 457(b) governmental plans, individual retirement accounts (IRAs), and others. The waiver applies to RMDs for 2009 only.
How Does It Help?
Under the tax law’s RMD rules, individuals generally must withdraw a minimum amount of money from their accounts annually after reaching age 70½ or pay a 50% tax penalty on the amount that should have been withdrawn but wasn’t. The RMD rules are intended to ensure that income taxes are eventually paid on the money accumulated in tax-deferred retirement accounts. Beneficiaries who have inherited tax-deferred accounts are also subject to minimum distribution requirements.
By eliminating the 2009 RMD, the new law gives some leeway to individuals who can afford to leave their retirement savings invested. If they choose not to take money from their accounts, they’ll avoid the income taxes that would otherwise be due on distributed amounts. Not taking a distribution will lower their 2009 adjusted gross income (AGI), which may lessen the effect of AGI-based restrictions on certain tax benefits. And, perhaps most important, they’ll buy time for their retirement investments to potentially recover.
Some Details
The RMD amount is usually determined by dividing the account balance as of the end of the previous year by a distribution period, generally a number from a uniform lifetime table. In most cases, the deadline for an account owner’s first RMD is April 1 of the year following the year the owner turns 70½. RMDs for each subsequent year must be taken by December 31 of that year.
Under the new law:
- Individuals who turn age 70½ in 2009 will not have to take their first RMD — technically, the RMD for 2009 — by April 1, 2010. Instead, the first RMD will be for 2010, and the deadline for taking it will be December 31, 2010.
- Individuals who have already begun taking RMDs may skip their 2009 RMD. RMDs will resume for 2010, and they must be taken by December 31, 2010.
Note that taxpayers who turned 70½ in 2008 and are required to take their first RMD by April 1, 2009, must still take those distributions.