If you have an IRA or other type of retirement account and are facing the possibility of having to sell investments low in order to take the required minimum distributions to avoid a tax penalty, there is relief in sight, at least for 2009. Normally you have to start taking required minimum distributions from your IRA or other retirement account in the year you reach age 70 ½ or by no later than April 1 of the following year in order to avoid the penalty. But many people have seen a considerable decline in the market value of their IRA or 401(k) recently. They would have to sell stocks or other investments at a low price, and possibly incur a loss, in order to take the distributions.
To avoid forcing people to sell their investments when the market value is depressed, in order to meet the required minimum distribution rules, Congress passed the Worker, Retiree, and Employer Recovery Act in December, 2008. This act temporarily lifts the requirement to take distributions. This allows owners and beneficiaries to leave the money in their plans so that hopefully they can recover some of the market value before they have to take distributions.
As explained by Deb Bauer, beneficiaries of someone else’s IRA, 401(k) or other retirement account also have to be concerned with required minimum distributions. This is because when the account owner dies, you as the beneficiary must generally start taking distributions. This rule also applies to Roth IRAs, even though the original owner was never required to take a distribution. But the new law changes that and places a one-year moratorium on required minimum distributions. You can skip the 2009 distribution if you reach age 70 ½ in 2009, or if you are a beneficiary and are currently required to take a distribution.
Anne Tergesen, writing for The Wall Street Journal, points out that the new law does not help people who turned 70 ½ in 2008, who have until April 1, 2009 to take their first required minimum distribution. Normally your required minimum distribution is your account balance as of December 31 of the previous year divided by your remaining life expectancy. You can find life expectancy tables for this purpose in IRS Publication 590.
If you turn 70 ½ in 2009, you will have until December 31, 2010 to take your first distribution, even though technically it will be considered your second distribution. Normally you would have to take your first distribution during 2009. You could wait with your first distribution until April 1 of the following year (2010). In that case, you would normally be required to take your first and second distribution in 2010. But the new law allows you to skip that first distribution completely.
As indicated by Proskauer Rose LLP, the new law does not provide relief to retirees who need to take money out of their IRAs or other retirement accounts in order cover their living costs. They will be forced to take distributions despite the moratorium on required minimum distributions. The primary beneficiaries will be the people who have sufficient other income or assets to cover their living expenses and can afford to leave the money in their retirement accounts in 2009.
Anne Tergesen, “Congress Revises Retirement-Fund Rules” – The Wall Street Journal Online
Deb Bauer, “A holiday from required minimum distributions” – money WI$E
Proskauer Rose LLP, “United States: Required Minimum Distribution Rules Suspended For 2009 For IRAS And Other Defined Contribution Plans” – mondaq
“Worker, Retiree, and Employer Recovery Act of 2008” – OpenCongress