News Flash – Required Minimum Distributions Suspended in 2009

While the details of the federal Economic Stimulus Plan are being resolved, some relief measures affecting individuals have already taken effect.

One of these that affects seniors is temporary suspension of the Required Minimum Distribution rules for IRA’s, 401(k)’s and similar retirement accounts.  The Worker, Retiree, Employer Recovery Act of 2008 provides that account holders who otherwise would be required to take minimum distributions in 2009 are relieved from that requirement this year.  In other words, they do not have to take the money out but can “let it ride.”  This should be good news for many taxpayers because it may further delay taxes but specifics need to be examined to see whether, in an individual case, it makes sense.

First, for those who do not know what a Required Minimum Distribution is or why the owner of a retirement account might want to delay distribution, here is some background.

What a Required Minimum Distribution Is and why, until now, it has been required.  A Required Minimum Distribution is a minimum amount that is required by the government to be withdrawn by certain taxpayers from their traditional IRA or other tax qualified plan in a tax year.  Seniors are generally affected at the year following the year when they turn age 70 ½.  Roth IRA’s do not have Required Minimum Distributions.

When John Smith, your average working individual, establishes a traditional IRA or contributes to a 401(k) plan at work, these funds are not counted toward his income for tax purposes that year.  This means that in that year his taxes are lower.  Taxes are deferred meaning that they are delayed but the government still expects to get taxes back at a later date – usually after retirement as John begins to withdraw the money.

If the fund is a 401(k) or 503(b), John may have the added benefit of employer contributions.  On leaving employment with that employer he can roll over the money into an IRA or he may decide to let it continue in the 401(k).  The taxes continue to be deferred.

In the year after the year that John turns 70 ½ the government expects John, if he has not already begun to do so, to begin withdrawing money from his IRA.  401(k)’s and similar tax qualified funds have similar rules but the terms of the individual’s plan should be consulted and John might delay on payouts on his 401(k) if he continues to work.

If John does not take his RMD when required, the government normally would tax him 50% of the amount he did not take but was required to take.  This is what was changed for 2009.  The tax penalty for failure to take the RMD was suspended for this year.

Typically, the government wants John to begin withdrawing his money since, as distributions are made to him, he begins to pay federal taxes on the money.  Remember.  The taxes were deferred, not eliminated.

Often taxpayers want to delay as long as possible the date when they have to begin paying tax.  This is why, over the years, many of my clients have grumbled at being required to take RMD’s.  Not knowing how long they will live or how much money they will need, they want to stretch the funds as long as possible and do not want to be forced to take distributions if they do not need them at the time.  If, when they die, funds remain in the account and the rules are followed, they may even be able to stretch the IRA through the life of their children or grandchildren.  Their children and grandchildren would then also have RMD’s but beginning with their inheritance and not delayed to after age 70 ½.

Should Seniors Take Distributions Even If Not Required or Should They “Let It Ride?”  In deciding whether to take distributions from a tax qualified account even if not required, here are some considerations.

  1. Is the money needed now?
  2. Are there deductions that would reduce or eliminate taxes?

In either case you may pay some tax since taxes were deferred previously.  However, you do not need to be concerned about how much or how little is withdrawn since the 50% penalty for failure to take a distribution is suspended this year.

You may also want to take a look at your IRA now to see whether you want to rebalance the type of investments in the account with the downturn in the market.

Check in advance with a tax accountant for details if you want to know the effect of decisions in your individual case.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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