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New Law Suspends RMDs For Just One Year

There’s good news and bad news for retirees in the new pension law—the Worker, Retiree and Employer Recovery Act of 2008. The good news is that you don’t have to take the usual “required minimum distribution” (RMD) from tax-qualified plans and IRAs. The bad news: The RMD exemption applies only for the 2009 tax year. The normal rule wasn’t suspended for 2008—when you probably needed it most.

If you own assets in a tax-qualified plan such as a 401(k), an IRA, or both, you ordinarily must begin taking RMDs by April 1 of the year following the year in which you turn age 701/2. For instance, if your 70th birthday was January 1, 2008, you became 701/2 on July 1 of that year, so you must take your first distribution by April 1, 2009. That’s actually the distribution for the previous year, and you have to take a second by the end of 2009. However, if you are still working and you don’t own five percent or more of the company that employs you, you may postpone distributions from qualified plans—but not from IRAs—until you actually retire.

The amount of the annual RMD is based on your life expectancy and the balance in your account on the last day of the prior year. Unfortunately, that means that RMDs for 2008 must reflect the account balance on December 31, 2007, even though that’s probably much more than the account is worth now, after the late-2008 stock market plunge.

Some retirees were hoping Congress would provide last-minute relief for 2008 RMDs. But the technical hurdles proved too daunting, as most retirees had already received their annual distributions before the law was signed. Moreover, the IRS has indicated it won’t change the rules retroactively. To compensate for being stuck with disproportionately large distributions for 2008, try investing your distributions in stocks in a taxable account and reap the rewards when the market rebounds.

At least the new law suspends the requirement for the 2009 tax year. If you can afford to leave your retirement nest egg untouched this year, you may be able to recoup some of the value you lost during the stock market downturn. With this temporary reprieve, you could stockpile more cash if the market rebounds.

But first-timers who turned age 701/2 in 2008 aren’t off the hook. Your first distribution, due by April 1, 2009, is actually for 2008, and you’ll still have to take it this year. But you won’t have to make a withdrawal for 2009. If you’re turning age 701/2 in 2009, you’d ordinarily have to take an RMD by April 1, 2010—a withdrawal the new law permits you to skip. But you’ll still have to take a distribution for the 2010 tax year by December 31, 2010.

Keep in mind that not taking the RMD (other than in 2009 when you don’t need to) is unwise. The penalty tax for failing to take an RMD is 50% of the amount of the required distribution you didn’t take.


This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.




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