Required Minimum Distributions for 2009
Well, the holidays are over, decorations are down, 2008 has been put to bed (thankfully; hope it stays down) and life begins to return to normal with high expectations for the new year. The 111th Congress goes to work this week (or at least convenes; no telling when it will actually do any work) and we’re off to the races. This will be an interesting legislative year!
While I normally don’t get too excited about new tax legislation until it passes both houses of Congress and is sent to Joint Committee, I will begin tracking 2009 tax bills as soon as they are introduced in either house of Congress. Some changes that have already been passed and signed into law may affect your financial and tax planning for the new year. One significant development involves 2009 “required minimum distributions” (RMDs) from retirement plans.
First, a little background. Participants in qualified retirement plans [such as 401(k)s], annuities, certain governmental plans, or regular individual retirement accounts (but not Roth IRAs) are generally required to take annual “required minimum distributions” from these plans once the participant has reached age 70-1/2. Since tax-deductible contributions are generally used to fund these retirement plans, the purpose of the RMDs is to trigger the deferred income tax on amounts in these plans during the participant’s lifetime. The amount of the annual distribution is determined by tables issued by the Internal Revenue Service, generally based on uniform life expectancy. The distribution increases as a percentage of the account balance each year. A participant must take his or her first RMD by April 1 of the year following the year in which the participant reached age 70-1/2. Otherwise, participants are required to take their RMD by December 31 of the year for which the distribution is applicable. The penalty for failure to take RMDs is a fifty percent excise tax on the amount not taken.
Probably all retirement plans with stock market and mutual fund investments suffered significant losses in 2008. Retirement plan participants who depended on distributions from their retirement accounts as a significant source of their income were hit particularly hard; they were taking necessary, if not required, distributions from rapidly depreciating assets. Plan participants over 70-1/2 were required to take distributions whether they needed them or not. Frequently, this meant realizing real losses within the plan simply to get cash with which to make the RMD.
There was some support late in the year for suspending the required minimum distribution requirement for 2008. This would have permitted individuals to forego the RMD if they did not need the distribution, leave the funds in the market, and potentially recover a portion of the unrealized losses as the market improves (as it will) over the next few years. I suggested that Congress even go so far as to permit tax-free recontribution of unneeded RMDs by individuals who had already taken them. The bottom line is that nothing happened with respect to calendar year 2008. There is relief for 2009 however.
Required minimum distributions are waived with respect to calendar year 2009. A participant’s first required distribution that he or she elected to take by April 1 of 2009 with respect to 2008 is still required, however. The next required minimum distribution will be for calendar year 2010.
Older individuals who can forego their 2009 distribution benefit the most from this change. Those for whom account distributions are necessary, even if not required, benefit the least. If you are in a position to forego some or all of your otherwise required 2009 distributions, you should notify the custodian of your plan. This is particularly important if you are receiving regular, monthly distributions. You may want to stop them immediately.
I wish the very best for you in this New Year! If you have questions concerning retirement planning or required minimum distributions, call me at 214.957.3366 or email me.
Ronnie
Copyright 2009 Ronnie C. McClure, PhD, CPA