RMD’s Suspended for 2009

January 12th, 2009

A new law passed late in 2008 allows taxpayers age 70-½ and over and those who have inherited IRAs (beneficiaries) to forego their required minimum distribution (RMD) from 401(k) plans, IRAs, and similar retirement arrangements for 2009.  Thus, these individuals can take a distribution less than required, even none, and avoid the 50% RMD penalty. Keep in mind that this is for tax year 2009 only.  So if you turned 70-½ in 2008 and delayed the first distribution from your IRA to 2009, as permitted in the first RMD year, you will still be required to make that delayed distribution in 2009 and no later than April 1, 2009. On the other hand, if you turn 70-½ in 2009, your first distribution would normally be required by April 1, 2010, but due to the new law’s suspension provision, a distribution for 2009 is not required. However, you will be required to take your 2010 RMD by December 31, 2010.

Background: The reason for the RMD is to ensure that taxpayers take at least some taxable distributions from their retirement accounts over their lifetimes.  These distributions are based on the taxpayer’s age, and the percentage of the retirement account that must be distributed each succeeding year increases based upon annuity tables.  Each year’s distribution is based on the value of the retirement account on December 31 of the prior year.

Problem: Most individuals have some, if not all, of their retirement funds invested in stocks or mutual funds. The decline in the stock market coupled with the requirement that the current year’s distribution be based on the prior year’s year-end value creates an unfavorable situation for withdrawals.  Because of the way in which RMDs are calculated (i.e., based on the previous year’s closing value), the law would have forced those individuals taking distributions in 2009 to receive a disproportionately large portion of their remaining account balance.  And, to generate the cash required for the distributions, they would have been forced to sell stock or mutual fund shares at exceptionally depressed values.  Therefore, this new law gives the taxpayer the opportunity to forego a distribution without penalty for 2009.

What You Should Do: Whether you should take a distribution, a reduced distribution, or no distribution at all for 2009 should be based on your unique financial and tax circumstances. Although this list by no means includes everything, here are some things to consider:

• If your taxable income for 2009 is low, you may wish to take a distribution anyway to take advantage of a zero or low tax rate.

• If you need to take a distribution to cover living expenses, you may still be able to minimize the distribution.

• If you are receiving Social Security and need to supplement your Social Security income with a distribution, keep in mind that the tax on the Social Security income is based on your total income, and by minimizing your distribution you might also reduce the tax on the Social Security income.

• If you can support your yearly living expenses with other funds, you can forego a distribution altogether for 2009.

• If your income is abnormally high for 2009 and you expect it to be lower in 2010, you might want to delay any distributions until 2010.

The foregoing is a summarization of the special rule for 2009. If you have questions or wish to optimize your 2009 distribution to suit your circumstances, please call our office to schedule an appointment.

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