2009 Suspension of the Required Minimum Distribution

The Worker, Retiree and Employer Recovery Act of 2008 authorized the suspension of the Required Minimum Distribution for 2009. Last year would have been a better year for Congress to waive the RMD, but we will gladly accept the tax cut this year and the extra time the reprieve provides for portfolio recovery. The legislation also presents opportunities for those who are willing to do a little extra tax planning.

Background
The Required Minimum Distribution suspension pertains to all forms of IRAs (traditional, SEPs and SIMPLEs) and applies to both owners and beneficiaries. Retirement plans, such as 401(k)s, 403(b)s and 457 plans, also benefit. The only exceptions are defined benefit plans, 72t payments and annuity payments resulting from annuitization; their pay outs will not change and will not be eligible for rollovers to an IRA. In addition, those over 70 ½ can still make Qualified Charitable Distributions for 2009, although the opportunity will be less inviting. (The QCD allows you to directly transfer assets from your IRAs to charities without reporting the distributions as taxable income.)

Something that hasn’t changed: your required beginning date. Even if you turn 70 ½ this year, 2009 will still be your required beginning date, although you won’t have to withdraw your RMD until 2010. When RMDs resume, you will calculate the distribution as if the suspension never took place.

Planning Opportunities:
Taxes: The suspension works best for those who do not need to live on their retirement accounts. This includes individuals who, excepting for the RMD, would not have to make withdrawals from their retirement accounts and those individuals who need the equivalent of the RMD income but who have brokerage accounts from which they can alternatively make their withdrawals.

Since brokerage accounts (individual, joint and trust accounts) report interest and dividends as income, whether or not the money is spent, withdrawals from brokerage accounts do not incur extra taxation, with the exception of potential capital gains when assets are sold. But here is the silver lining to 2008: most brokerage accounts are sporting carry-over losses from 2008, so that the sale of holdings is unlikely to generate capital gains taxes in the near future. Meanwhile the IRAs and the retirement plans, which don’t see withdrawals in 2009, have the benefit of another year of full tax deferral.

Roth Conversions: Normally, if someone over 70 ½ wants to convert a portion of their traditional IRA to a Roth, the individual is required to take their RMD before completing the conversion. RMD distributions cannot be deposited into Roth IRAs. In 2009, however, any distributions from IRAs can go directly to the Roth. Instead of paying taxes on both the RMD and the conversion, you only have to pay taxes on the conversion. This will allow individuals to transfer more money to their Roth in 2009. This, of course, is beneficial only if you are not dependent on taking withdrawals from your IRA to live on in the first place. Reminder: for one more year, the adjusted gross income limitations of $100,000 still apply.

For a number of individuals The Worker, Retiree and Employer Recovery Act of 2008 will help save on taxes in 2009. In its own small way, WRERA may even prove to be a tax cut for those who otherwise will not receive tax savings from the stimulus plan.

StrategicPoint Working with You
If you have any questions on your 2009 Required Minimum Distribution, please feel free to call us.

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