The House and Senate on December 10 and 11, 2008, respectively, approved the Worker, Retiree, and Employer Recovery Act of 2008 by unanimous consent. President Bush signed the Act into law on Tuesday, December 23.
The legislation contains provisions related to retirement plans, as well as numerous technical corrections to the Pension Protection Act of 2006 (PPA). Among the most notable provisions of the new law for Individual Retirement Account (IRA) owners is one that would provide older Americans with financial flexibility in their retirement plans to better deal with the economic crisis and resulting steep declines in the equity markets. Generally, the tax laws require a taxpayer to begin taking distributions from his or her traditional IRA soon after reaching age 70½ (Roth IRAs are not subject to the required distribution rules). The provision allows taxpayers, regardless of their total retirement account balance, to waive the required minimum distribution for 2009. The waiver also applies to beneficiaries of IRA owners.
The suspension of the required minimum distribution is designed to allow retirees to keep money in their accounts and possibly recover some of the losses sustained in 2008. As of December 17, the S&P 500 Index, a widely followed index of U.S. stock market activity, had declined approximately 38 percent from its 2007 high. Without the suspension, taxpayers aged 70½ and older would have to sell depleted-in-value assets, such as stocks and mutual funds, held in their retirement accounts in order to make required minimum distributions. For those who fail to make the full required minimum distribution, the current rule imposes a 50-percent excise tax under Code Sec. 4974(b) on:
- the tax year’s required minimum distribution,
- less the amount that was actually withdrawn from the taxpayer’s retirement account.
If the required minimum distribution (RMD) is waived for 2009, the excise tax wouldn’t apply for that year. However, the law does not affect RMDs for 2008, which should be taken under the existing rules.
Individuals who turned 70½ in 2008 have until April 1, 2009, to take their 2008 distribution. However, individuals who reached age 70½ before 2008 must have taken their distributions by December 31, 2008.
A bill, the Retirement Account Distribution Improvement Act of 2009 (S 157), introduced in the Senate on January 9, 2009, would allow taxpayers to re-contribute to an IRA RMDs taken for tax year 2008 and waive the RMD for 2010. I will monitor the progress of this bill and report any important events.
For more detailed information with regard to specific provisions of the Act, please see Anne Turgesen’s article in The Wall Street Journal, which is in question-and-answer form. Also, The Washington Post has a good article on the subject by Kimberly Lankford of Kiplinger.com.
The full text of the Act may be found at the Library of Congress’s website.
RMD Worksheets
IRS Guidance to Financial Institutions on RMDs for 2009
IRS Frequently Asked Questions on RMDs
General Information on IRAs
