january 11, 2009 - In your last article, you mentioned the possibility of required minimum distributions being suspended. Could you expand on that?

The stock market's decline has been cruel to all investors, but doubly so for the millions of people who must take required minimum distributions (RMDs) from qualified retirement plans and IRAs that are invested heavily in stocks or mutual funds. Because of the way in which RMDs are calculated (i.e., based on the previous year's closing value), the law has forced these individuals to receive a disproportionately large portion of their remaining account balance. And they have been forced to sell stock or mutual fund shares at exceptionally depressed values. This double hit affects not only retirees but also beneficiaries of qualified plan accounts and IRAs who must take minimum distributions from the accounts they inherited. The Pension Act (H.R. 7327, the "Worker, Retiree and Employer Recovery Act," passed by Congress and signed by the President on December 23) helps out, but for next year only. More specifically, for calendar year 2009 only, plan account participants and IRA owners don't have to make otherwise required lifetime RMDs, Likewise, their beneficiaries also don't have to take minimum distributions.

Background on RMDs . Employer-provided defined contribution qualified retirement plans, IRAs and individual retirement annuities are subject to the RMD rules. Generally, RMDs must begin by the required beginning date (RBD), which usually is April 1 of the calendar year following the later of the calendar year in which the individual reaches age 70 1/2. But for employer-provided qualified retirement plans, the RBD for non-5% company owners is delayed to April 1 of the year following the year in which the individual retires. For IRAs and defined contributions plans, the RMD for each year generally is determined by dividing the account balance as of the end of the prior year by a distribution period carried in a uniform table in the regulations.

Penalty for failure to make RMDs. Failure to take an RMD triggers a 50% excise tax under Code Sec. 4974 , payable by the qualified plan participant or IRA owner or his beneficiary. The tax is imposed during the tax year that begins with or within the calendar year during which the distribution was required. The tax may be waived if the distribution did not occur because of reasonable error and reasonable steps are taken to remedy the violation.

New law. Under the Act, no RMD is required for calendar year 2009 from individual retirement plans and employer-provided qualified retirement plans that are defined contribution plans. The next RMD will be for calendar year 2010.

Please note that this relief provision would not help a taxpayer who attained age 70 1/2 in 2008 but chose to wait to receive his first RMD. He would still have to make that first RMD by Apr. 1, 2009, however, he would not have to make the otherwise-required RMD for 2009.

Who benefits from the RMD suspension. The Pension Act's suspension of RMDs for 2009 helps retired taxpayers who are well-to-do and do not need to rely on their RMDs for living expenses. By not making the RMD for 2009 (or withdrawing less than the RMD) from their qualified plan accounts and/or IRAs, they will wind up with less taxable income for 2009, and, possibly, avoid (or mitigate the effect of) AGI-based phaseouts of tax breaks. They will also have more tax-sheltered amounts to leave to their beneficiaries. Those retired, wealthy taxpayers who are well on in years will stand to benefit the most, because their (short) table-life expectancy factors would otherwise compel them to take large RMD payouts in 2009.

The nontax advantage to not making the 2009 RMD is that those taxpayers who have retirement funds invested in beaten down assets, and can afford to wait, will have an opportunity to (hopefully) watch their investments recover before having to sell assets in order to make withdrawals.

The Pension Act's suspension of RMDs for 2009 also helps taxpayers who don't need to take required beneficiary distributions from qualified plan accounts or IRAs during 2009. They, too, can keep down their AGI, keep more funds within the tax-shelter of the retirement account, and avoid having to sell depressed in value assets in order to make required distributions.

Who doesn't benefit from the RMD suspension. The Pension Act's suspension of RMDs for 2009 means nothing to the many, many elderly taxpayers who must make regular withdrawals (sometimes in excess of the RMD) from their retirement plan accounts and IRAs in order to get by each month. For the past year or so, those with a substantial portion of their retirement funds invested in stocks or mutual funds have been forced to take payouts from constantly dwindling account balances. They are likely to continue along that difficult pattern in 2009, barring a dramatic market turnaround.

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