Best Tax Tips

Almost everyone’s portfolios have taken a hit in 2008 with the slowdown in the economy. The recently-passed Worker, Retiree and Employer Recovery Act helps individuals who must take required minimum distributions (RMDs) from their retirement accounts. The Act suspends RMDs for 2009.

What is an RMD
A RMD is the amount that an individual must take from his or her qualified retirement account on an annual basis over the course of his or her life expectancy after retirement. Generally, distributions must begin not later than April 1 of the year following the year in which the individual retires or attains age 70 1/2. The RMD rules are intended to prevent individuals who have no current need for the funds from extending the tax subsidy for retirement savings indefinitely.

Distributions are generally calculated by looking back to the last day of the previous year. For 2008, individuals must look back to December 31, 2007. At that time, market values were generally much higher than today.

Individuals who fail to take a RMD are liable for an excise tax. The IRS can impose an excise tax of 50 percent on amounts not distributed.

2009 RMD Suspension
However, lawmakers voted to suspend RMDs only for 2009 as part of the Worker, Retiree and Employer Recovery Act . The suspension applies to all qualified defined contribution plans, including 401(k), 403(b), 457(b) and IRA accounts. The suspension will allow seniors to keep more of what’s left of their tax-deferred retirement savings intact until the markets rebound.

The Treasury Department and the IRS were contemplating issuing RMD relief for 2008. However, both agencies recently cited their limited ability to provide relief uniformly to all individuals required to take minimum distributions. The IRS and Treasury also emphasized the complications and confusion that would arise for individuals and plans sponsors if relief was granted.