2009 RMD Waiver Relieves Retirees in a Down Market.

George Bush enacted the RMD waiver into law in December 2008 under the Retiree and Employer Recovery Act when the financial crisis was at its peak and stock portfolios held in IRAs and other tax deferred retirement accounts were at its lowest values. An RMD or required minimum distribution is the amount an account holder must withdraw in order to pay taxes.  Of course one may withdraw more in order to meet living expenses and medical bills and other such necessities or luxuries.

This requirement begins in April of the year one turns 70 ½.  The money must be withdrawn by December 31.  If the RMD is not withdrawn, then a 50% penalty is imposed on the amount that was not withdrawn.    The RMD is basically how the government ensures that it receives taxes on your retirements accounts that were allowed to accumulate and gain value tax free.  It’s a revenue stream that helps pay for all the wonderful services we receive as U.S. citizens.  The RMD only applies to IRAs and employer sponsored retirement plans such as 401k and 403b plans.  If you own a Roth IRA, you do not have to worry as the money used to fund this type of account has already been taxed and therefore exempted from this requirement and obviously waiver.

The IRS determines your required minimum distribution based on your life expectancy and the balance in your retirement account.  Your accountant can tell you what your RMD should be.  You can also find your RMD at IRS.gov.  Many financial and retirement related websites also have retirement calculators for RMD.  Just Google RMD calculator.  Retirees have benefitted from the 2009 RMD waiver because it allows them to recover some or hopefully all of the losses endured in 2008.  Absent a waiver, a retiree would have had to make a withdrawal on a lower account balance and force to take losses.  Instead with the waiver, one will likely have a lower taxable income while enjoying the potential of having account values (including the RMD not withdrawn) grow once again with the thriving stock market.  As a result, some may benefit by not having to pay taxes on social security income as well.

Don’t expect the waiver to be extended to 2010.  The growing sentiment that the U.S. economy is out of danger and the 50%+ advance in the stock market has the administration and the IRS preferring to get its portion of taxes from retirement accounts.  That said the resumption of 2010 RMD will be based on account balances as of December 31, 2009.  If you turned 70 ½ this year you would have had the privilege and responsibility of taking your first distribution if there was not a waiver.  Make certain for 2010 you do it (your RMD) by December 31, 2010.  If you already took a distribution this year, you have the option of putting that money back into your IRA as long as you do it by November 30, 2009.  Please discuss this matter with a tax or financial planner to ensure compliance with IRS requirements.

2009 RMD (Required Minimum Distribution) Waiver and Tax Penalty

If you are an IRA holder and upon reaching 70 1/2 this year in 2009, you are required to withdraw some of your money in order to begin paying taxes on it.  This is called a required minimum distribution (RMD) and is mandated by the Internal Revenue Code.  If an individual fails to take an RMD, the penalty can be 50 percent of the amount to be withdrawn.  In the fall of 2008 the Bush administration allowed provisions for a one year waiver on RMDs due to the drop in the stock market and resulting decreases in retirement account values.

Remember, you do not have to take RMD from your account in 2009 in order to pay taxes that were required if the waiver was not approved.  However, in 2010, RMDs are required and do not change.  You will be required to take a distribution by December 31st, 2010 if you turned 70 1/2 this year. Additionally, these RMDs must be calculated for each IRA account, tax sheltered annuity (403b) owned.  You are permitted to withdraw the total amount owed from one or more accounts. If you have a 401k or deferred compensation plan, then the withdrawal must be taken separately from each account.

If you do not take an RMD by the deadline, the amount not withdrawn will be taxed at 50% of the excess accumulation-which is the difference between the amount that was required minus the amount actually withdrawn.  In this case, you must file an IRS form 5329-additional taxes on qualified plans.  This form is filed with your federal tax return for the year the full amount of the RMD was not withdrawn.  If you can demonstrate that the failure to withdraw your RMD was reasonable and are taking steps to correct the error, the penalty may be waived.  Your explanation must be in writing to the IRS.

Tax Protection for your IRA

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This solution can work with any tax qualified account including all IRAs, 401Ks, 457s, 403bs, SEPs, ESOPs, etc. Give us a call for a no a no obligation analysis of your tax risk and potential solutions to protect you and your family.