IMPORTANT TAX LAW CHANGE AFFECTING YOUR RETIREMENT PLAN:
WHAT YOU NEED TO KNOW
Regardless of what has happened recently in the financial markets, retirement accounts remain one of the largest assets many people own. As such, it is important to understand the “rules of the game” with respect to the minimum distribution requirements for those retirement accounts, and how these rules have changed for the 2009 tax year.
Required Minimum Distributions, Generally
When? Once a participant attains age 70 ½, the participant is required to begin taking minimum distributions from his or her retirement plan(1), with the exception of any Roth IRA or Roth 401(k) plans which do not have such a requirement. Normally, the first required minimum distribution must be taken from the retirement account on or before April 1st of the year following the year in which the participant attains age 70 ½, and subsequent minimum distributions must be taken by December 31st for every year after the plan participant attains age 70 ½. There is the potential that two distributions would be made in the first year, one in April and the other in December, if the first minimum distribution is deferred. You should consult with your plan administrator to make sure the distributions happen in a timely fashion, particularly for the first distribution which may or may not be automatic.
How much? The minimum distribution a participant is required to take from his or her own retirement plan is calculated based on the participant’s actuarial life span plus ten years. In other words, the distributions are meant to be taken, and the account depleted, over the course of the participant’s projected lifetime plus ten years. This distribution requirement is favorable to the participant as it allows the participant to defer the income tax which is due on distribution over a longer period of time than his or her life. Of course, the participant can always withdraw more than the minimum if desired, but the minimum withdrawal is critical. If a participant fails to withdraw the minimum by the due date, he or she incurs a penalty equal to 50% of the amount that should have been withdrawn.
What about a Beneficiary? On the death of the plan participant, the beneficiary of a retirement plan must take any remaining required minimum distributions for the year of the participant’s death that the participant did not take for himself or herself. The beneficiary must then take minimum distributions every year thereafter, based on a variety of factors including whether or not the plan participant died before or after taking required distributions and the life expectancy of the beneficiary and/or plan participant. A surviving spouse has additional deferral options as the beneficiary of a retirement plan, including the option of rolling over, tax-free, the entire retirement plan into his or her own retirement plan, in which case the minimum distribution rules for participants would apply, as described above.
Suspension of Required Minimum Distributions for 2009
In late 2008, in response to significant losses in the stock market, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008. Part of the Act temporarily waives the minimum distribution requirement for the 2009 tax year. This means that an individual, whether a plan participant or beneficiary, can skip taking the 2009 required minimum distribution, thereby enabling the participant or beneficiary to leave the distribution in the retirement account, ideally to allow the assets invested in the account to recover from the economic downturn on a tax-deferred basis and to prevent the account from further depletion by withdrawal. The suspension did not apply to any 2008 required minimum distributions that were deferred until 2009, which distributions had to have been taken by April 1, 2009.
You will need to review your retirement plans to determine how the Act will impact your individual circumstances. Many plans have been drafted to mirror the tax laws, which until recently, had required a minimum distribution to be taken on an annual basis. Absent quick work on the part of the plan administrators, plans may automatically make distributions under the plan guidelines despite the tax law changes for 2009. If you are a plan participant or a spouse beneficiary who receives a distribution, you have the option of rolling over the distribution into a rollover IRA within 60 days of the distribution without having to recognize the income tax on the distribution. Unfortunately, if you are a non-spouse beneficiary who receives a similar distribution, you have no option but to receive the distribution and pay the accompanying tax.
Qualified Charitable Contributions Extended
The Emergency Economic Stabilization Act of 2008 was signed into law on October 3, 2008, and has extended qualified charitable contributions for tax years 2008 and 2009. A participant who is 70 ½ years or older can donate up to $100,000 from the pre-tax money of the participant’s IRA account(s), and the donated amount will be excluded from the participant’s income. This provides the charitably inclined participant with a tax-favored option for making charitable contributions.
For more information about how the tax laws affect your retirement plan, we suggest that you consult with your own tax planning professionals.
(1) For purposes of this article, the retirement plans to which
we refer are “defined contribution plans,” such as
401(k) plans, 403(b) plans, IRAs, employee stock ownership
plans, and profit sharing plans.