Peacock Tales

Volume 19, Number 2 · April 2009

Waiver of Required Minimum Distribution for 2009

Worker, Retiree and Employer Recovery Act of 2008 signed into law

Prior to January 1, 2009 an individual who was a participant in a retirement plan or had an IRA was required once they reached the age of 70 1/2 to take Required Minimum Distributions ("RMDs") each year based upon the age of the individual and certain factors established by the Internal Revenue Service.

On December 23, 2008 the Worker, Retiree and Employer Recovery Act of 2008 was signed into law by President Bush. The new law provides that retirement plan account participants, and IRA owners and their beneficiaries do not have to take distributions throughout 2009. Thus, taxpayers who can take advantage of this change won't be forced to sell stock or mutual fund shares held in retirement accounts when their values are exceptionally depressed. Some individuals may need to continue to withdraw amounts to meet their monthly needs. For taxpayers who do not, by passing in 2009 they will wind up with less taxable income for 2009 and might avoid, or mitigate, the effect of the phase outs of tax breaks based on higher income. They will also have more tax sheltered amounts to leave to their beneficiaries while avoiding selling assets at a loss.

There is no need to show that a retirement plan account or IRA is "in distress" because of stock market conditions in order to qualify for the 2009 suspension. The suspension applies equally to IRAs invested entirely in FDIC-insured bank-CDs as well as IRAs invested in depressed-in-value stocks or mutual funds.

If a beneficiary is using the five-year rule for determining the distributions for an individual who died before his required beginning date, then the five-year period under the new rule is determined without regard to calendar year 2009 and extends the five-year period an additional year.

If an individual is receiving distributions from an employer provided plan, each plan must decide whether it will waive the 2009 payouts for all of its participants. In order for a plan to waive the 2009 distributions, a plan amendment may be required. Individuals who are receiving monthly payments and do not need them for 2009 should ask the plan administrator to stop further monthly distributions until a decision is made by the Trustees of the plan whether to waive them for 2009. This will prevent additional distributions that may not be required and prevent those monies from being included in income during the year 2009. All 2009 distributions that are made may be eligible for roll over distributions into an IRA or other employer plans, thereby avoiding immediate taxation on the distributions.

This waiver does not apply to distributions for 2008 or those that must be made in 2009 by reason of an individual becoming 70 1/2 in 2008. The next RMD will be for calendar year 2010. But for 2009 this one year moratorium may ameliorate the effect of taking a large distribution in 2008 based on a high balance at the end of 2007, prior to the collapse of the market.

We recommend you discuss this change with your tax professional and your financial advisor. If the withdrawals are being made from employer-provided contribution plans you should also verify with your plan administrator that you are permitted to defer withdrawals for the year 2009 under the provisions of the plan document. Hopefully, the Department of Treasury will issue regulations to address the details of many of these issues in the coming days.