The Worker, Retiree and Employer Recovery Act of 2008 was recently passed to provide financial flexibility in these tough economic times. A primary component of this new law is the suspension of Required Minimum Distributions (RMDs) from retirement plans in 2009. This provision is designed to prevent retirees from having to sell retirement plan or IRA assets at distressed values in order to generate the cash needed to make their RMDs.
What the Act Means for Participants
Qualified retirement plans and IRAs are subject to various rules regarding Required Minimum Distributions. Generally, participants must begin taking annual distributions from their plans once they attain age 70½. The first RMD, however, may be deferred until April 1 of the following year. The amount of each annual RMD is generally determined by dividing the account balance at the end of the prior year by a distribution period published by the IRS. Distributions are taxed as ordinary income (unless the participant made nondeductible contributions). Furthermore, failure to take an RMD will subject the participant to a 50% excise tax.
The Worker, Retiree and Employer Recovery Act of 2008 suspends the RMD requirements for 2009, which means that the next RMD for IRA owners and qualified defined contribution plan participants will be for calendar year 2010. The act does not, however, affect the RMD requirement for participants who attained age 70½ in 2008 but chose to defer their distribution until April 1, 2009.
For participants who attained age 70½ in 2009, no RMD is required for 2009. However, these participants will need to take an RMD for 2010, which must be done by December 31, 2010. Unfortunately, it cannot be deferred until April 1, 2011, even though it is technically the first RMD.
Inherited IRAs and Qualified Plans
Beneficiaries of inherited plans must also take Required Minimum Distributions. While Roth IRAs are not subject to RMD rules during the owner's lifetime, there are post-death requirements that apply. The relief provided by the Worker, Retiree and Employer Recovery Act of 2008 extends to beneficiaries of inherited IRAs and retirement plans, similarly waiving the RMD requirements for 2009. Under the act, beneficiaries of an IRA, Roth IRA or other qualified plan may skip taking the RMD in 2009. Furthermore, if you are following the Five-Year Rule to comply with the RMD requirements and if tax year 2009 falls within the five-year period following the retirement account owner's death, the act automatically extends the payout period by one year (thus making it a six-year payout period).
Benefits of the RMD Suspension
By suspending RMDs for 2009, the Worker, Retiree and Employer Recovery Act of 2008 offers tax relief to participants and beneficiaries of IRAs and other defined contribution plans who would not otherwise take withdrawals (e.g., participants that do not rely on their RMDs for living expenses). By not taking a 2009 RMD, the participant or beneficiary will decrease his or her taxable income for 2009 and will keep more assets within the tax shelter of the retirement account. In addition, if IRA or defined contribution plan assets have declined in value, the waiver of 2009 RMDs will provide an opportunity for the investments to recover before having to be sold to make withdrawals.© 2010 Much Shelist Denenberg Ament & Rubenstein, P.C.