December 31, 2008
In an effort to help retirees through the recent economic downturn, a new tax law allows individuals to keep more assets in their qualified plans and retirement accounts in 2009. The Worker, Retiree, and Employer Recovery Act of 2008 (the "Recovery Act of 2008"), enacted on December 23, 2008, temporarily suspends the required minimum distribution rules applicable to certain retirement accounts. For those retirees who can afford to not make any withdrawals from their retirement accounts, this new law will, if the market rebounds over the next year, help retirees recoup some of their 2008 losses. This relief applies only to calendar year 2009 and is subject to certain limitations.
Required Minimum Distributions.
To prevent indefinite tax-deferred growth, federal law requires that a required minimum distribution (RMD) be withdrawn from certain tax-deferred retirement accounts each year. The RMD rules apply to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans, as well as traditional IRA and IRA based plans such as SEPs, SARSEPs, and SIMPLE IRAs. 1 Generally, owners of these types of accounts must begin to withdraw a RMD no later than April 1 of the year following the year in which the owner attains age 70½ or retires, whichever is later. 2 Generally, the RMD amount is computed by dividing the balance of the account on December 31 of the prior year by a life expectancy factor provided by the IRS. 3 If an account owner dies before he or she is required to withdraw a RMD, the entire amount of the account must be distributed either (1) within five years of the owner's death or (2) over the life of the beneficiary beginning the year after the account owner's death. Failure to withdraw the RMD results in a 50% tax on the amount that was required to be withdrawn.
Suspension of RMD in 2009.
Because retirement account values plummeted in 2008, Congress has decided to suspend the RMD requirements for calendar year 2009. If the stock market rebounds, the suspension will give retirees the opportunity to begin rebuilding the value of their accounts without having to sell additional assets to meet the RMD requirements. In addition, retirees who forego making RMD withdrawals will have less taxable income in 2009. The suspension applies to account owners as well as to beneficiaries who are withdrawing the account under either the life expectancy rule or the five-year rule (the suspension effectively allows beneficiaries using the five-year rule six years to withdraw the account). However, if an account owner reached age 70½ during 2008, the owner must make his or her first RMD distribution by April 1, 2009, but will not have to make any other RMD withdrawals in 2009.
1 RMD rules also apply to Roth 401(k) plans, but only after the owner dies.
2 If the account is an IRA or the account owner is a 5% business owner of the business sponsoring the plan, RMDs must begin at age 70½, whether or not the account owner is retired.
3 IRS tables containing life expectancy factors can be found in Publication 590, Individual Retirement Arrangements (IRAs).
For a detailed discussion regarding the contents of this article, contact Old Capital Law Firm. The attorneys at Old Capital Law Firm provide estate planning, estate and trust administration, tax planning, and related legal services in Delaware's First Capital.
Beverly J. Wik
Matthew P. D'Emilio
Old Capital Law Firm
222 Delaware Street, The Green
P.O. Box 470
New Castle, DE 19720
T. (302) 221-3000
F. (302) 221-2980
www.oldcapitallaw.com
This material is provided for your general information and is not intended as legal, tax, or investment advice. Because of the complexity of laws related to required minimum distributions, you should consult your attorney or tax advisor regarding the applicability of The Worker, Retiree, and Employer Recovery Act of 2008 to your specific situation.