Relief from Required Minimum Distribution Rules for 2009

The Worker, Retiree, and Employer Recovery Act of 2008 (the “Act”) became law on December 23, 2008. The Act waives 2009 Required Minimum Distributions (RMDs) from Individual Retirement Arrangements (IRAs), 401 (k), Profit-Sharing, Money Purchase Pension, 403 (b), and certain 457 retirement plans.

The law generally requires taxpayers over age 70 ½ to take a Required Minimum Distribution (RMD) from their IRA or other defined contribution plan every year. The RMD for each year is determined by dividing the retirement account balance as of the end of the prior year by a factor found in an IRS life expectancy table.

The Act gives a special waiver for 2009 only. No RMD need be withdrawn in 2009. The tax policy concern was that with the drop in the financial markets over the last year or more, the market value of these plans was already drastically reduced. Congress wanted to give taxpayers a break by letting them skip the 2009 withdrawal.

The Act’s suspension of RMDs for 2009 will help retired taxpayers who do not need to rely on their RMDs for living expenses. By skipping the 2009 RMD, they will have less taxable income for 2009, and, possibly, avoid adjusted gross income (AGI) based phase-outs of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. Older recipients will benefit the most, because the shorter the life expectancy, the larger the percentage of required RMD payout.

The 2009 waiver of the RMD provides no benefit at all to those taxpayers who must make regular withdrawals from their retirement plan accounts and IRAs in order to get by each month. The amount withdrawn in 2009 will still be taxable income.

If you inherited an IRA from a decedent who died in 2008, be careful. If the IRA account owner named multiple beneficiaries, in order for each beneficiary to withdraw over his or her life expectancy, the IRA must be split up into separate inherited IRAs by the end of the year following the owner’s death. Because of the waiver, if the IRA owner died in 2008, you don’t have to take an RMD in 2009. That might lead you to assume you can put off dealing with the inherited account. Not so. You still must split the IRA up into separate accounts by December 31, 2009. The 2009 RMD for each beneficiary of a separate account is waived.

For beneficiaries who are required to take RMDs using the five-year rule, the five-year period under that rule is determined without regard to calendar year 2009. For example, for an IRA owned by an individual who died in 2007, the five-year period ends in 2013, instead of 2012.

If you turned 70 ½ in 2008, you had until April 1, 2009 to take your 2008 RMD. If you waited until 2009 to take your 2008 RMD, then ordinarily, you would also have to take your RMD for 2009 also, making 2 RMD withdrawals in one year. For 2009 only, you can make just one withdrawal, the 2008 RMD that you put off until 2009. That 2008 RMD is not waived by the Act. Only the 2009 RMD is waived.

If you turned 70 ½ in 2009, in the absence of the 2009 RMD waiver, you would have been required to take your first RMD (the 2009 RMD) by April 1, 2010, and then take your 2010 RMD (the second RMD) by December 31, 2010. The Act waives the first RMD (the 2009 RMD) for account owners who turn 70 ½ in 2009. The 2009 RMD waiver does not affect RMDs required for 2010. If you turned 70 ½ in 2009 you are still required to take your second RMD by December 31, 2010.

What happens if you already took your 2009 RMD? Maybe you didn’t know about the special waiver for 2009 passed by Congress. You can put the RMD back. There has always been a 60 day rollover period to repay a distribution. For 2009 only, the rollover has been extended to Nov. 30, 2009. If you took a distribution in 2009, you can put back up to the amount of your RMD, or roll it into an IRA, and not pay taxes on the returned money if you can get it back into an IRA within 60 days or November 30, 2009, whichever is later. Rollovers are limited to one a year from each account; this has not changed.