Relief from Required Minimum Distribution Rules - But Only for 2009

December 30, 2008

A recent tax law change promises to help give retirees and retirement plan beneficiaries some much needed flexibility in managing their finances during these trying financial times. A key provision in the recently passed Worker, Retiree and Employer Recovery Act of 2008 provides relief to retirees and others by allowing them to continue to keep more money in retirement accounts in 2009. The The Act provides relief only for 2009 distributions; Required Minimum Distributions for 2008 will still need to be made before Dec. 31, 2008. Here's a brief summary of this new provision:

Required Minimum Distribution Basics.  Under the required minimum distribution (RMD) rules, participants in "qualified plans" and individual retirement accounts (IRAs) are generally required to begin taking distributions no later than April 1 of the year after they attain age 70½. The amount of the RMD each year generally is measured by dividing the account balance as of the end of the prior year by a distribution factor (generally, a life expectancy factor from the uniform lifetime table published by the IRS). If an individual dies, the beneficiaries of the individual's retirement plans and IRAs are also required to take distributions measured by dividing the account balance as of the end of the prior year by a distribution factor.¹ The distribution period is generally equal to the remaining years of the beneficiary's life expectancy. If the designated beneficiary is the individual's spouse, commencement of distributions can be delayed until Dec. 31 of the calendar year in which the deceased individual would have attained age 70½.

Roth IRAs are not subject to the RMD rules during the IRA owner's lifetime. However, Roth IRAs are subject to the post-death minimum distribution rules that apply to traditional IRAs. For Roth IRAs, the IRA owner is treated as having died before the individual's required beginning date. Thus, only the life expectancy rule and the five year rule apply.

Failure to make an RMD triggers an onerous 50 percent excise tax, payable by the individual or the individual's beneficiary.

New Law. The 2008 Recovery Act provides a one year suspension of the RMD rules for 2009. Specifically, no minimum distribution is required for calendar year 2009 from Individual Retirement Accounts and defined contribution retirement plans (such as Section 401(k) plans). The exemption also applies to so-called Section 457(b) eligible deferred compensation plans maintained by a state, a political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state. Thus, any annual minimum distribution for 2009 from these plans is not required to be made. The next RMD will be for calendar year 2010. This relief (referred to as the "2009 RMD waiver") applies to life-time distributions to employees and IRA owners and after-death distributions to beneficiaries.

The 2008 Recovery Act's relief provides that  a taxpayer who attained age 70 ½ in 2008 but chose to wait until Apr. 1, 2009, to receive his first RMD (for 2008) would still have to make that first RMD by April 1, 2009. However, he would not have to make the otherwise-required RMD for 2009.

For beneficiaries who are otherwise required to take RMDs using the five-year rule, the five-year period under that rule is determined without regard to calendar year 2009. Thus, for example, for an account with respect to an individual who died in 2007, the five-year period ends in 2013, instead of 2012.

The 2008 Recovery Act's suspension of RMDs for 2009 helps retired taxpayers who are well-to-do and do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. Older recipients will benefit the most, because their (short) table-life expectancy factors would otherwise compel them to take large RMD payouts in 2009. 

From a nontax standpoint, those taxpayers that can afford not to take their 2009 RMD will have an opportunity to allow their investments to recover (if the market rebounds over the next 12 to 24 months) before having to sell assets in order to make withdrawals. The new law does not benefit those taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month. For the past year or so, those with a substantial portion of their retirement funds invested in stocks or mutual funds have been forced to take payouts from constantly dwindling account balances. They are likely to continue along that difficult pattern in 2009, barring a dramatic market turnaround.

No Relief for 2008. A number of Congressmen have written the Treasury Department asking for RMD relief for 2008. In the past, Treasury responded that Congress is considering temporary relief and that IRS is considering other ways that retirees' RMD problems could be "ameliorated administratively." But on Dec. 17, Kevin I. Fromer, Assistant Secretary for Legislative Affairs, wrote Rep. George Miller and informed him that in light of passage of the Pension Act, Treasury and IRS "have determined that any further change to the required minimum distribution rules should not be undertaken ...Thus, all individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules and, as a result of relief provided by Congress, they will be entitled to a complete waiver of the requirement to take any distributions for 2009."

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¹ For an individual who dies before his or her required beginning date, there are two alternative methods for satisfying the after-death RMD rules: either (1) the life expectancy rule, or (2) the five year rule.  Under the life expectancy rule, annual RMDs may be made over the beneficiary's life expectancy, but this rule is only available if the designated beneficiary is an individual or a qualifying trust (e.g., not the individual's estate or a charity).  If the beneficiary is not an individual or a qualified trust, the five year rule must be used.  Under the five-year rule, the individual's entire account must be distributed no later than Dec. 31 of the calendar year containing the fifth anniversary of the individual's death.