Retirement plan rules change for 2009

Tax Tip of the Week
December 29, 2008

Are you looking at the balance in your retirement accounts and wishing you could skip a year of your required minimum distributions? The Worker, Retiree, and Employer Recovery Act grants your wish - but only for 2009.

The rules for 2008. Generally, once you reach age 70½ you're required to begin taking distributions from retirement accounts such as 401(k)s and traditional IRAs. The required minimum distribution (RMD) rules also apply if you're a beneficiary of these accounts.

The amount you have to take is based on life expectancy tables published by the IRS and the balance in your retirement accounts at the end of the previous year. So, for instance, your 2008 required distribution is calculated using the balance in your accounts on December 31, 2007.

You can take the RMD in a lump sum or spread it out over the year, and you can choose to liquidate assets and withdraw cash, or transfer investments such as stock "in-kind" to a taxable account without selling them. Whatever the method, you pay tax on the amount withdrawn. Failing to take a distribution, or taking less than the rules call for, triggers a penalty of 50% of the shortfall.

What's changed for 2009. Thanks to the Worker, Retiree, and Employer Recovery Act, you won't have to take an RMD for calendar-year 2009. That's true no matter the balance in your accounts, and no matter your income.

CAUTION: Under an exception available only for your first RMD, you can postpone a distribution until April of the following year. However, the new rules do not apply to these delayed RMDs, meaning that if you reach age 70½ in 2008, but decide to put off your initial withdrawal until 2009, you still have to take that distribution.

The Act also contains provisions regarding funding rules for retirement plans and makes it mandatory for employer provided pension plans to allow rollovers to non-spouses beginning in 2010. Please call if you would like more information.

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