RMD Relief for 2009, Not 2008
Posted By Marty Higgins | February 16th, 2009
Congress and the IRS disappointed investors in late 2008. The steep decline in IRA values caused many investors to ask for a suspension or reduction in required minimum distributions from IRAs and other qualified retirement plans for those over age 701,. Congress did not act, and the IRS said it had no authority to suspend the rules.
But changes were made for 2009 RMDs and you should factor these changes into your planning. We first alerted members to these changes in December with a posting on Bob’s Journal on the members’ section of the web site. You should check the Journal regularly or subscribe to the RSS function that is explained on the site. (The RSS subscription is free.)
The penalty for failing to take an RMD from an IRA or other qualified retirement plan (50% of the amount that was supposed to be distributed) is waived for those who do not take RMDs in 2009. In effect the Worker, Retiree and Employer Recovery Act of2008suspendsRMDs for 2009. You can take whatever amount you want from your IRA in 2009, and that amount will be included in gross income. But you do not have to take the full RMD if you do not need it or want it. The idea is this gives the IRAs a better chance to recover some of their 2008 losses by compounding from a higher base.
The waiver applies to both original owners and to beneficiaries of IRAs and other qualified plans.
The next RMD will be for 2010 and will be based on the Dec. 3 1, 2009 value-if the law is not changed.
A tricky part of the change affects those who tum age 701/2 in 2009 so that their first RMD is due by April1, 2010. For these IRA owners, no distribution is required for 2009, meaning no distribution is required by April 1, 2010. However, those individuals will be required to take the regular2010 RMD by Dec. 31, 2010 using the Dec. 31, 2009 account value.
Likewise, someone who turned age 701, in 2008 still is required to take the first RMD by April 1, 2009 based on the Dec. 31, 2007, account value.
As we discussed last month, this is a good time to convert a traditional IRA to a Roth IRA. This law makes it a little easier. Under regular law, an RMD still must be taken in the year an IRA is converted to a Roth, and the RMD is included in gross income. In 2009, you can convert whatever amount you want (if your adjusted gross income is less than $ 100,000) and not worry about taking an RMD for the year. The full IRA can be converted.
The RMD always seemed to me to be bad policy. It is based on the notion that Congress should provide incentives to save for your retirement but only for your retirement. There shouldn’t be any money left to pass on to heirs unless you die prematurely. The law was developed at a time when life expectancies and retirement were much shorter. For several years there have been. Proposals to either eliminate the RMD or postpone it until a later age. Congress should use this crisis as a reason to take one of those actions.
