Making the most of the IRA required minimum distribution holiday.

• Author: Rose, Stanley

In late 2008, President Bush signed into law the Worker, Retiree, and Employer Recovery Act of 2008, P.L. 110-458 (the act). The act waives, for 2009 only, the required minimum distribution (RMD) rules applicable to retirement plan withdrawals, thereby allowing retirees to forgo a year's distributions. The benefit of this suspension may seem obvious: It enables the beneficiary to defer taxable income and hopefully allows the holdings--likely battered over the past year--to recover before being further depleted. However, before blindly forgoing the distribution, beneficiaries should consider some planning opportunities before the suspension expires at the end of this year.

Background

The RMD rules are found in Sec. 401(a)(9) and related regulations. In general, the rules apply to various traditional IRAs (not including Roth IRAs) and defined contribution plans sponsored by employers. Holdings cannot remain in these plans to sidestep the government's tax coffers indefinitely; the RMD rules call for distributions to commence by April 1 of the year following the calendar year in which the beneficiary turns 701,4 years of age or, if later, April 1 of the year following the year of retirement in the case of an employer-sponsored plan if the recipient owns less than 5% of the sponsoring entity. Subsequent distributions are paid by the end of each plan year.

Generally, the rules call for distributions to be paid in annual installments over the account owner's expected lifetime. For nonspousal beneficiaries of inherited plans, annual distributions generally are paid over a five-year period or in certain cases over the life expectancy of the designated beneficiary. Each distribution is based on the value of the holdings at the end of the previous year. A 50% penalty may be imposed on RMDs that are not paid.

The act's provisions make sense in light of the mathematics behind the RMD rules:

Example: Retiree R has IRA holdings valued at $200,000 on December 31, 2007, and a life expectancy of 10 years. Her RMD would be $20,000 (10% of the value). Also assume R withdrew her 2008 distribution late in 2008 following a 35% market decline that left the value of her holdings at $130,000. R's $20,000 distribution now represents 15 % of her holdings. The one-year RMD waiver provided by the act will allow such a disparity to be avoided during 2009.

Planning Opportunities

The act provides some flexibility, the benefits of which should not be overlooked. Forgoing...