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MAKING CENTS OUT OF THE NEWS
Blog #1
(January 1st, 2009)
A YEAR WITHOUT RMD'S - IT'S A GOOD THING
By Tom McAllister, CFP™
This week President Bush signed legislation suspending, at least through 2009, mandatory distributions from regular IRAs and from pension funds. Required Minimum Distributions (RMDs) are minimum amounts that a retirement plan account owner must withdraw annually beginning with the year he or she reaches age 70 ½ . Anyone who is still working past that age can continue to defer withdrawals, with the exception of those who own 5% or more of the business which sponsors the retirement plan.
Under regular rules, retirement plan participants and IRA owners are responsible for taking these withdrawals, taking them on time and in the correct amounts and - paying ordinary income tax on dollars withdrawn. Failure to comply means very stiff penalties. Of course anyone who wishes may take more than the minimum as long as he/she is willing to pay taxes due.
How does the system work for the very first withdrawal? Again under the regular rules, any participant who turned age 70 1/2 during 2008 would have had the choice of taking the first RMD before the end of 2008, or of waiting to take it until as late as April 15, 2009 and then taking a another withdrawal, by the end of '09.
The new withdrawal holiday legislation is certainly top-of-mind for me. I turned 70 ½ in May 2008, and, to avoid having to take two distributions in 2009, I went ahead and took my '08 RMD. (Had I know there would be a suspension of withdrawals for 2009, I would have waited until April 15 of this year to take my '08 withdrawal!)
The basic concept behind Required Minimum Distributions is this: We are allowed to defer tax on retirement accounts by delaying withdrawals. That's Uncle Sam's way of encouraging us to save for our own retirement needs. But those tax breaks are meant to help people prepare for retirement, not to allow them to accumulate money tax-deferred until death. (I have no problem with this concept, and neither should you.)
Of course, some people die before their IRA or retirement plan RMDs have begun. Now it is their beneficiaries who must follow RMD rules. Generally, the entire amount of the owner’s retirement or IRA must be distributed to the beneficiary(ies). This may be done all at once at any point within five years of the owner’s death, or withdrawals may be spread over the life of the beneficiary (or the oldest of several beneficiaries) starting no later than one year following the owner’s death.
The RMD rules apply to all employer sponsored retirement plans, including profit-sharing
plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, and even the new Roth 401(k) accounts. RMD rules do not apply to Roth IRAs while the owner is alive.
What I want to stress as we begin the new tax year is that the rules surrounding Required Minimum Distributions are long and complex, so this 2009 withdrawal "holiday" can mean a welcome chance for all of us to do some long-term tax planning and estate planning. Without careful planning, results may be very different from your intentions. It's crucial to work with your financial planner, tax advisor, and estate planning attorney to carefully craft beneficiary designations for all retirement plans and also for any annuities you own. As you may imagine, the timing of required retirement plan distributions needs to be carefully coordinated with the sale of securities to reap maximum tax advantage and potentially reap thousands of dollars in saved tax).
This latest legislation is part of the government's strategy to help Americans recover from the economic downturn. Deferring IRA and retirement plan withdrawals buys time for retirement accounts to recover losses before taxes need to be paid. But, as I said, this no time to take a rest from planning. When it comes to tax, investment, and estate planning, we've got pitfalls to avoid and opportunities to seize. Let's go at it! I wish us all a happy, prosperous, blessedly RMD-free new year.
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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