Tag:

RMDs

Qualified/Retirement

WSJ Follows up on Suspended Required Minimum Distrubtion for 2009

by Evan

I briefly mentioned in my Article about Missing RMDs (Required Minimum Distributions) that RMDs were actually suspended for tax year 2009 (but remember not 2008!).  Well, today I found a great Q&A/Follow up on the Wall Street Journal Personal Finance Section website. It is appropriately titled “Details on the New IRA Rule” and was written by Anne Tergesen.

Ms. Tergesen does a great job asking Ed Slott some simple Q&As.   Mr. Slott, whose website I use almost daily is an IRA expert and is often quoted in the Wall Street Journal as such.  Additionally, I think Mr. Slott has a PBS program/infomercial but to be honest I haven’t seen it.  Most importantly, Mr. Slott produces an AMAZING monthly newsletter.  Now that I am done kissing up to Mr. Slott (lol!)

If I need to take a withdrawal from my account in 2009, can I still do so?

Yes. While the requirement to take a distribution is suspended in 2009, you can always tap your account.

Does the suspension apply to both traditional 401(k)s and Roth 401(k)s?

Yes.

When I resume taking withdrawals in 2010, how should I calculate the minimum amount to take out?

In any year, the formula calls for taking your account’s balance as of the previous Dec. 31 — and then dividing by your remaining life expectancy. Using this method, your first step in 2010 will be to look up your account balance as of Dec. 31, 2009. To ascertain your remaining life expectancy, use the figure that corresponds to the age you’ll turn in 2010, which can be found in IRS Publication 590.

Does the law apply to an IRA I have inherited, even if I am not yet 70½?

Yes. If you have inherited an IRA, you can skip your required distribution in 2009.

I am taking regular distributions from my retirement account under section 72(t) of the tax code. Am I allowed to skip my withdrawal in 2009?

No. Section 72(t) deals with people younger than 59½, while the law suspending distributions applies to those over 70½ and to IRA and plan beneficiaries. As a result, you will still have to take your required withdrawal.

Does the suspension apply to tax-deferred annuities or defined-benefit pension plans?

No, it applies only to IRAs, 401(k)s, and similar defined-contribution retirement plans.

If I decide to skip my IRA distribution this year, do I have to notify my financial-services company?

No. The financial-services company should know that distributions have been suspended for the year. Still, in January financial-services companies generally send out notices reminding customers to take their mandatory withdrawals.

If you receive such a letter, it wouldn’t hurt to instruct your broker or banker to put your withdrawal on hold this year. If you are mistakenly issued a check, you can roll the money back into your IRA with no tax consequences. But don’t delay: You have only 60 days after receiving the money to do this.

If I choose to withdraw money from my traditional IRA this year — either to spend it or to fund a Roth IRA — will this create taxable income?

Yes. Any money withdrawn from a traditional IRA is subject to income tax. But in 2009, with required distributions suspended, any money you withdraw from a traditional IRA can be used to fund a Roth. Normally, those taking mandatory distributions from a traditional IRA aren’t allowed to turn around and convert that money into a Roth IRA.

I think the most important Q&A, for my readers, is the fact that you don’t have to take an RMD for an inherited IRA.  I only say this cause I have no indication that many readers are 70.5+ years of age, and while I have a few professionals that check my site out, I think its mostly everyday peeps!

Do you have any other questions that I can try to find the answer to?

2 comments
0 FacebookTwitterPinterestEmail
Qualified/Retirement

Did you forget your RMD this Year? All may not be Lost

by Evan

One of the Planner’s asked me an interesting question the other day,

What can we do when someone doesn’t take their Required Minimum Distribution?

What are Required Minimum Distributions?

Before we get into my research, lets start with the question, what are RMDs? Like I have said in the past, when you have a question like this go to the source, the IRS, which define RMDs as,

Required Minimum Distributions (RMDs) generally are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that he or she reaches 70 ½ years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½, regardless of whether he or she is retired.

Retirement plan participants and IRA owners are responsible for taking the correct amount of RMDs on time every year from their accounts, and they face stiff penalties for failure to take RMDs.

When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.

When do you have to start taking your Required Minimum Distribution?

An account owner must take the first RMD for the year in which he or she turns 70 ½. However, the first RMD payment can be delayed until April 1st of the year following the year in which he or she turns 70 ½. For all subsequent years, including the year in which the first RMD was paid by April 1st, the account owner must take the RMD by December 31st of the year.

While I doubt that any of my daily readers are 70+ but I’d love to hear if you are! Most likely it is a boomer’s parent or fellow late 20 year old’s grandparent.  So pass along the info!  IT SHOULD BE NOTED THAT RMDs ARE SUSPENDED FOR 2009 (Full Article HERE) BUT NOT FOR 2008! For this particular post it is irrelevant how to calculate the dollar amount.

In this Planner’s case, there were problems with bad drafting by an attorney 10 years ago with a trust not meant to be the beneficiary of a qualifed account (More information about protecting qualified Accounts with Trusts CORRECTLY) and a deceased husband leaving a confused Widow and an angry daughter.

What happens if a person does not take a RMD by the required deadline?

So with a little research on the IRS’ website I was able to provide the following printout:

If an account owner fails to withdraw a RMD, fails to withdraw the full amount of the RMD, or fails to withdraw the RMD by the applicable deadline, the amount not withdrawn is taxed at 50%. The account owner should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his or her federal tax return for the year in which the full amount of the RMD was not taken.

Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation.

Want more information? Check out Publication 590 and Form 5329 and Instructions thereto.

1 comment
0 FacebookTwitterPinterestEmail