RMD Requirement Suspended for 2009
You don’t have to take a required minimum distribution (RMD) from your IRA in 2009.
Under the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) signed by President Bush on December 23, 2008, RMDs for IRAs and other qualified defined contribution plans are suspended. It is a one year waiver for 2009 only.
This is welcome news to retirees who are looking at accounts whose values have steeply declined. The amount required to be withdrawn is determined by reference to the account value at the beginning of the year. When investment values decline sharply, a RMD taken later in the year takes a bigger chunk of the balance in the IRA.
IRA owners and beneficiaries may not want to withdraw assets from retirement accounts at this time because they may need to sell stocks and bonds at a depressed price in order to access their funds. The hope is that the market will rebound by 2010, at which time it would be more logical to sell the stocks and bonds to meet the RMDs.
Many hoped that relief would be granted for 2008 since the 40% stock market decline occurred during calendar 2008. However, WRERA does not provide any relief for 2008 RMDs. This is very unfortunate. Apparently Congress thought the implementation of such a late change in the tax law wouldn’t work. For some taxpayers, the ability to skip a year will make up the loss. Of course, that assumes you can afford not to take your RMD – which cannot be assumed. WRERA does not provide relief for those persons who actually need to use their IRAs and retirement accounts for their support – in these cases the individuals will still take distributions regardless of the suspension of the RMD rules.
Consequently, the primary beneficiaries of the RMD relief rules of WRERA are those account owners and beneficiaries who have sufficient other income or assets so that they do not need to take any withdrawals from their retirement accounts.
There is talk that when Congress reconvenes in January that there still might be some relief for 2008, but a waiver of the RMD for 2008 looks very unlikely.
IRA owners are required to take a minimum annual amount out of any traditional IRAs beginning in the year when they reach 70 ½ years of age, or no later than April 1 of the following year. For example, if you turn 70-1/2 in 2009, you would normally be required to take your first RMD by April 1, 2010.
The RMD is calculated based on the owner’s age (older folks must take out more) and the IRA balance at the end of the previous year. The RMD provision also applies to traditional 401 (k)s but not to an individual’s own Roth IRAs or Roth 401 (k)s. Roth IRA distributions are not taxable. Failure to make a RMD triggers a 50% penalty tax calculated against the RMD that should have been distributed in that particular year.
You must also take RMDs if you are a beneficiary of a decedent’s IRA, 401 (k) or other retirement account, because when the account owner dies, regardless of age, you must begin taking RMDs. This is also true if you are the beneficiary of a Roth IRA, even though Roth IRA owners are never required to take RMDs.
Normally, people who reach age 70½ in 2009, and who wait until April 2010 to take their first withdrawal, would have to take two distributions in 2010: one for 2009 (their first distribution) and one for 2010 (their second distribution). That second distribution would have to be taken by Dec. 31, 2010.
Since the new law suspends distributions for 2009, first-timers — anyone who turns 70½ in 2009 — won’t be required to make a 2009 withdrawal, which normally would not have to take place until April 1, 2010. But he or she will need to make the 2010 withdrawal, and that will be considered your “second” distribution, even though in reality it will be your first withdrawal. Therefore you’ll have to take it by Dec. 31, 2010. (Individuals who turn 70½ in 2009 will not be able to wait until April 1, 2011 to take their first withdrawal.)
For beneficiaries of inherited IRA’s who are taking the money out under the five year rule, you can stretch your five-year deadline out by another year.
These provisions provide relief to participants in and beneficiaries of IRAs, SEP-IRAs, SIMPLE IRAs, 401 (k) plans, money-purchase plans and profit-sharing plans. WRERA does NOT apply to defined benefit plans.
Another provision added by WRERA is that qualified plans will be required to allow non-spousal beneficiary rollovers to inherited IRAs effective in 2010 (this provision is currently optional and the vast majority of plans have not offered the option).