RMDs Suspended

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) suspended required minimum distributions (RMDs) for 2009.  If you’re not familiar with RMDs, these are distributions that you are required to take from your traditional IRA and employer sponsored plans (401Ks) beginning at age 70 ½.

This is a one-time suspension of RMDs, effective for 2009 only.  This suspension was created in response to the sharp declines in the stock market, with the purpose of allowing individuals to keep the funds invested in their IRAs instead of being forced to take distributions when the market, and thus their account values, were significantly down.

Many people took their RMD in 2009 either because they weren’t aware of the change, or they had their RMD setup for automatic withdrawals and they failed to modify withdrawal instructions with their broker or financial institution.

Reversing Unwanted RMDs

Thankfully, the 60-day rollover rule allowed many people to reverse unwanted RMDs, if caught in time.  The 60-day rollover allows taxpayers to roll funds received (from RMDs or other IRA distributions) back into an IRA or other qualified plan within 60 days to avoid the tax bill from the original distribution.

Unfortunately, many people missed the opportunity to do a 60-day rollover either because they didn’t know they could, or they weren’t aware that they didn’t have to take their RMD until after the 60 days had passed.

Relief For Taxpayers Who Missed the 60-Day Rollover Period

As a result, the IRS issued Notice 2009-82 which provides relief to people who missed the 60-day rollover window, allowing them to roll unwanted RMDs back into their IRAs, but only through November 30, 2009.  This relief is retroactive (the notice wasn’t issued until September 24, 2009), so people who took RMDs as early as January can use this exception to return the funds back to their IRA account.

This relief may not help everyone who took unwanted RMDs however.  The following people will not benefit from this exception to the 60-day rollover rule:

• IRA owners who took more than one distribution from their IRA in 2009.  The 60-day rollover only allows you to roll one distribution back into your IRA per year, so people who took their RMD in monthly or quarterly installments will only be able to roll one of those distributions back into their IRA.
• IRA beneficiaries: the suspension of 2009 RMDs applies to both IRA owners and beneficiaries, but the 60-day rollover rule (and the exception created by Notice 2009-82) only applies to IRA owners.  So if you inherited an IRA (and you are not the spouse of the IRA owner), and you took an RMD distribution in 2009, you can not roll that distribution back into the IRA.

How to Rollover the Funds

So far we’ve talked about rolling any unwanted RMDs back into your IRA account, but that’s not your only option.  Regardless of where the RMD came from, you have three options for rolling them back over, including:

• Rolling the funds back into an IRA (does not have to be the same IRA you took the distribution out of)
• Converting the funds into a Roth IRA (income limits apply for 2009), or
• Rolling the funds into a qualified plan (not all qualified plans accept rollovers)

Who Should Rollover RMDs Back Into Their IRAs?

Rolling unwanted RMDs back into your IRA may not be the best option for everyone.  People who want tax deferral or who want to convert traditional IRAs to Roth IRAs in 2010 should consider rolling any unwanted RMDs back into their IRAs, along with those who want to use their IRAs for charitable contributions.

However, people who rely on their RMDs to meet living expenses, or those who believe that taxes are going up (and expect to be in a higher tax bracket later) should not roll their RMDs back into their IRA.  In addition, if you’ve already done a 60-day rollover this year, you can’t do another rollover.

Bottom line, consult with your tax advisor to determine if you would benefit from rolling any unwanted RMDs back into your IRA.  But hurry, the deadline for completing rollovers (unless you are within the 60-day period) ends on November 30^th.

Congress approved legislation this week that will provide some relief to Americans over 70 1/2 who have suffered significant losses in their IRA accounts.  The bill will temporarily suspend the excise tax that is levied when seniors fail to the the required minimum distribution (RMD) from their retirement accounts.

This penalty is waived for 2009, which means that seniors will not be required to take withdrawals from their tax deferred retirement accounts during 2009, which will hopefully give these accounts time to recover before the 2010 required distribution.  Unfortunately, this law does not apply to 2008 when it would have made the most difference to investors who have lost significant amounts in their accounts.

If you’re not familiar with the RMD, basically taxpayers who are age 70 1/2 must take annual required minimum distributions from their tax-deferred retirement accounts, including traditional IRAs, 401Ks and 403Bs.  The amount is based on your life expectancy and the prior December 31 balance of your account.  Failure to withdraw this amount and you will be levied a 50 percent penalty on the amount that you should have withdrawn… and this is in addition to your regular income tax!

Surprisingly, there is still talk that the RMD for 2008 will be suspended.  If relief is passed for 2008, taxpayers who have already taken their distributions will be allowed to re-contribute those funds so they don’t have to pay taxes on them.  We should know by mid next week if the 2008 RMD is also suspended.