Benefits for Those Waiving Retirement RMDs

I am a little under the weather, and so I appreciate that I have this guest post from TJ Valenzuela at Trust Administration Services today! It’s about waiving retirement RMDs. Enjoy!

With the passing of The Worker, Retiree and Employer Recovery Act of 2008, the penalty for not taking an RMD, or required minimum distribution from retirement accounts, for individuals 70 1/2 or older will be waived for 2009. This can have a number of benefits for people nearing retirement.

In the past, retirement account owners who are at least age 70 1/2 have been required to withdraw the RMD from their retirement accounts by April 1st the first year and by December 31 of every succeeding year versus
continuing to, potentially, let that money remain in the account to grow. Not taking a RMD typically, otherwise, would result in the IRA owner having to pay a hefty 50% excise tax on any required minimum not paid within the required deadline.

Recently, a number of circumstances has led the government to make an exception with the passage of the government financial Relief Act that waives the RMD requirement for 2009 and eliminates tax penalties for individuals 70 1/2 or older that do not take an RMD.  At the end of 2008, most American retirement accounts fell significantly, creating a few unique problems. The first, the 2008 RMD was based on the December 31, 2007 value for all retirement accounts.  Investors that waited until the final quarter of 2008 may have been faced with a portfolio that was a fraction of the prior year’s value and may have had to liquidate assets at historically low prices to raise the cash to pay his/her tax responsibility. Those who waited faced a conundrum.

The government financial relief act provides several benefits to participants and IRA owners over age 70 1/2, including:

1)    Any individual who attains age 701/2 in 2009 will not be required to take a first RMD by April 1, 2010.  However, the distribution for the 2010 calendar year must be taken by December 31, 2010.

2)    Those over age 70 1/2 may keep more money in their retirement plans for a longer period of time with the potential for that money to grow.

3)    Those households that do not need the money, and meet the requirements, can now skip a year on taking an RMD, enabling the money grow tax deferred to potentially leave more to their heirs.

4)    Those over age 70 1/2 can convert to Roth IRAs the amounts they would otherwise have had to take as required distributions.

5)    Not taking the RMD, which is taxed as ordinary income, could put the
individual into a lower overall tax bracket, reducing his or her overall tax federal and/or state tax.

6)    For beneficiaries under the 5-year rule, the 5-year deferral period is extended by one year (e.g., if an individual died in 2007, the period would end in 2013 instead of 2012).

7)    Individuals may still choose to make IRA charitable rollover gifts during 2009.

The relief applies to RMDs due to be paid out to satisfy the 2009 RMD requirement. The waiver applies to IRA, 401(a), 401(k), 403(a), 403(b) and governmental 457(b) plans.  This legislation does not affect 72T Distributions or Defined Benefit Plan Contributions.

Individuals that have been taking RMDs for years and have grown to depend
on them as a source of retirement income may still take distributions in 2009.  Those that are already set up for automatic distribution(s), but want to take advantage of the 2009 Relief Act, should contact their Custodian to cancel their 2009 distribution(s).

The current administration has suggested that it is considering extending the waiver on RMDs to 2010. It is difficult to predict what the legislative bodies may do. It is, however, unlikely that there will be a waiver for the 2008 RMD, retroactively, since it would require a refund from the federal government.

TJ Valenzuela is with TAS (Trust Administration Services), a leading
personal management provider of self-directed IRA retirement accounts,
retirement planning services, and custody accounts at www.trustlynk.com.

Image source: Sam Ilic Photography via Flickr