RMD Waiver for 2009

I have some news for those of you who, like me, have reached the wonderful 70s, or as the Spanish say, tiene setenta años (have seventy years). I got the news from an article someone sent to me.

I realize that this column may not be of immediate help to those of you who are not yet septuagenarians—I was addressed that way recently, and didn’t know whether to take umbrage or pleasure in the title—and won’t be affected by this for years. However, many of you have parents who are in that range, so you need to inform them about this little-known change. Also, the waiver applies to those who are not yet 70½ but inherited a retirement plan or IRA that would normally require the RMD.

In these troubled times when many of us are suffering from IRA deficiency (a.k.a. Sapped Savings Syndrome), it may be welcome news that your beneficent federal government has seen fit to allow us to suspend the required minimum distribution (RMD) from our tax-deferred plans such as 401(k) or IRA accounts.

I will refer to accounts as IRAs, even though the same rules apply to any tax-deferred investment or savings account. The only difference is that each type of account, 401(k), 403(b), 457(b) or traditional IRA, must be treated and distributed separately. (That is a huge motivator for combining all personal retirement accounts into a single IRA once you retire.)

In case you don’t do your own taxes and you let your IRA holder figure out your distributions, the Required Minimum Distribution Rule says that you must withdraw a portion of your tax-deferred savings based on a life-expectancy table. That is supposed to deplete your IRA, forcing you to pay all the deferred taxes before you die.

The RMDs must start in the calendar year in which you turn 70½ and must be completely withdrawn by April 1st of the following year. The value of your IRA is based on its value on December 31st of the prior year. It is a fifteen-month window and that is a critical point in all this.

I won’t go into all the technical stuff about how to figure RMDs. If you don’t know that by now, then you better have a tax preparer who can do it for you. If you don’t withdraw the required amount, you can be heavily taxed and penalized for the oversight. Any required funds not withdrawn are taxed at 50 percent. If you fail to withdraw $1,000 from your account, you will have to pay out $500 in tax penalty.

The information I do want to impart to you is that, due to the downturn in the economy in general and in the stock market in particular during the past two years, many people in the category above have been forced to withdraw required minimum distributions on accounts that no longer have the value they did at the end of the previous year.

Near the end of President George W. Bush’s second term in office, December 23, 2008 to be exact, he signed the Worker, Retiree and Employer Recovery Act of 2008. Tucked inside that legislation is a waiver for RMDs in 2009.

Because the signing of the Recovery Act took place during the holidays, there was little if any reporting of it. Of course, it didn’t help that GWB was in severe disfavor with the American people in the final days of his administration either. No news media was willing to give him any credibility at all after the 2008 election.

Anyway, the signing of the Workers, Retirees and Employers Recovery Act of 2008 gives retirees the choice of whether or not to take distributions from their personal retirement accounts. In effect, if you have the income from company retirement, Social Security and other taxable sources to carry you through this turmoil, you can leave tax-deferred accounts alone to (hopefully) recover their values.

This provision would have been a big help last year too, since the current market slump started in May of 2008 and caused values of tax-advantaged accounts to decrease dramatically during the year. Those values were considerably higher at the end of 2007 and RMDs were calculated on those higher values.

Now comes the bad news. Even though the stock market is still in turmoil, the Recovery Act does not allow any waiver for next year. Unless Congress extends the provision or writes new legislation to cover that period, RMDs will be back in 2010. The current waiver only applies to the fifteen-month period between December 31, 2008 and April 1, 2010, the 2009 tax year for required minimum distributions.

Congress would have been kinder to the elderly by merely suspending the taxes due on the RMD withdrawals for 2009, thereby benefiting those who depend on those withdrawals to pay living expenses, the lower income retirees. If you are one of those, you will still have to withdraw the money and pay your taxes on it. Your only relief will be that you won’t be required to withdraw the entire sum if you can live on less than the full amount.