No Required Minimum Distributions (RMDs) for 2009 (article)


	Jeff Bither

March 2009

Good News: No Required Minimum Distributions for 2009

The one-time-only RMD relief applies to lifetime distributions to retirement plan owners as well as to after-death minimum distributions to beneficiaries

For taxpayers who have been hit hard by the sharp decline in the value of their investments, the consequences are worsened if they are forced to sell, in a depressed market, to take a required minimum distribution (RMD) from their IRAs and qualified retirement plans.

To address this hardship, on December 23, 2008, President Bush signed legislation that provides relief with respect to the annual RMD that is normally imposed on individual taxpayers over age 70½. As a result of this law change, the RMD for 2009 is waived, and the next RMD that must be withdrawn will be for calendar year 2010. This relief applies to lifetime distributions to retirement plan owners as well as to after-death minimum distributions to beneficiaries.

Example. Martha, who reaches age 76 during 2009, normally would have been required to withdraw $12,500 from her IRA this year. This amount is based on her current age and the balance in her IRA as of December 31, 2008. As a result of the law change, Martha is excused from taking a required withdrawal during 2009. In 2010, Martha is again required to take a distribution, which will be based on her age of 77 and the balance in her IRA at the beginning of 2010. No “catch up” of the omitted 2009 distribution is required.

Strategies. So now that IRA withdrawals are voluntary during 2009 for those over age 70½, what should you do? If you do not need to supplement your household account, the general rule will be to avoid the extra taxable income by not taking any IRA withdrawals during 2009. But even if you need the extra cash, you should consider using other after-tax savings, particularly if you can avoid liquidating IRA investments that are depressed in value. Even modest income filers may find surprisingly large tax savings from this approach, as decreasing taxable IRA withdrawals can also decrease the portion of Social Security benefits that are reportable as taxable income.

Example. At age 78, Art would have been required to withdraw $10,000 from his IRA during 2009. If Art takes no taxable IRA distribution this year, his taxable income decreases by $15,000, consisting of the $10,000 of avoided IRA income and $5,000 of Social Security benefits that are no longer taxable. This saves Art over $3,000 in federal income tax in 2009. (Social Security benefits “phase in” to taxability based on the amount of other taxable income, and they become reportable at either a 50% or 85% ratio to other taxable income.)

There may be some cases in which it is efficient to withdraw some taxable IRA funds. The deferred income on IRA accounts will inevitably be taxed someday, either to you or to your heirs. Thus, if you have large medical expenses or other tax deductions, you should withdraw sufficient taxable IRA amounts to offset those deductions and, possibly, to utilize the lower income tax brackets.

Charitable contributions. If you have a substantial net worth and higher income, don’t overlook the annual opportunity to remove up to $100,000 of IRA funds via direct transfer to charity. This provision remains available in the tax law during 2009, even though the RMD rule is waived.

IRA funds are taxed harshly in the hands of high net worth individuals, who face both a top rate income tax (currently 35%) and the 45% estate tax. Using the direct IRA-to-charity transfer is a highly tax-efficient method of meeting your charitable objectives.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.