Did you know that taxpayers turning 70 ½ may be subject to the Required Minimum Distribution rules regarding certain retirement plans?  However, minimum distributions are suspended for 2009.

What is RMD?
A required minimum distribution is the amount a plan participant must withdraw from his or her retirement plan account each year after the participant retires or reaches age 70 1/2 (depending on the type of plan).  The rules apply to IRAs, SIMPLE IRAs, and SEPs.  The rules do not apply to ROTH IRAs.

The RMD rules limit the time period that funds may remain tax-deferred in a retirement plan. For those individuals who can afford not to take a distribution, it is tempting to put off taking distributions indefinitely so that the plan benefit can continue to accumulate tax free as long as possible. The minimum distribution rules are designed to limit this temptation by requiring that distributions be made under very strict requirements. Failure to comply with these requirements may result in a significant penalty.  The penalty is 50% of the amount you were required to take reduced by any amounts you actually received as distributions during the year.

How is your RMD calculated?
The value of your IRA at December 31st of the prior year is divided by your distribution period from the IRS’s Uniform Lifetime Table (ULT).  Unmarried owners of IRAs, or married owners whose spouses are not more than 10 years younger and whose spouses are not the sole beneficiaries of their IRAs, can use the table embedded in this article.  Taxpayers who do not meet the previous requirements are subject to alternate distribution periods. You must repeat this calculation for each of your retirement accounts.

Example: Sally is age 74 and her IRA is worth $40,000 at December 31, 2009. Her distribution period from the ULT is 23.8 years.  Sally is required to take a distribution of $1,681 ($40,000 /23.8) for 2010.

What is the deadline for your required distribution?
You must begin taking distributions after you reach age 70 ½.  Your first distribution is due by April 1st of the year after you turn age 70 ½; all other distribution are required by December 31. The ability to delay a distribution until April 1 of the next year is only available for the first year.

Example: Joe turns age 70 ½ in 2010. His first required minimum distribution for 2010 (based on his prior year account balance at December 31, 2009) is due by April 1, 2011.  His RMD for 2011 (based on his prior year account balance at December 31, 2010) is also due by December 31, 2011.  If Joe waits until April to take his first distribution, he will be required to take two distributions in 2011. 

How may you receive your required distribution?
You do not have to receive your distribution in one lump sum; you may spread it out over multiple payments throughout the year as long as your total distributions exceed the RMD amount.  Although you must calculate the RMD for each account individually, you may receive the total calculated amount from any one or more of your accounts. If you receive more than the RMD amount in one year, the excess cannot carry to a future year. You must take the RMD regardless of the amounts received in prior years.

Are distributions required for 2009?
The Worker, Retiree, and Employer Act of 2008 waives the RMDs generally applicable to retirement plans that are suspended with respect to defined contribution arrangements, including IRAs for 2009. Plans and arrangements must be formally amended to waive the RMD requirement.  If your plan allows, you are not required to take a distribution for 2009.  Taxpayers who turn 70 ½ may skip their first year RMD. However, the distribution for 2010 is due by December 31, 2010 and cannot be delayed until April 1.

Example: Mary turns age 70 ½ in 2009. She is not required to take a RMD for 2009, which would have been due April 1, 2010 and based on her account value on December 31, 2008.  The RMD for 2010 is due December 31, 2010 and is based on Mary’s account value on December 31, 2009.  Even though the 2010 distribution is her first RMD, she cannot delay the distribution until April 1 of the next year.

The rules for required minimum distributions can be complex and require proper planning to avoid any unforeseen tax consequences. There are numerous income tax, estate tax, and wealth transfer issues that affect RMDs. For example, who you designate as a beneficiary to your retirement plan may affect the amount of the annual distribution during your lifetime. In addition, if you currently have your estate or a trust as the designated beneficiary of your retirement plan, benefits could be subject to a complete distribution within five years of your death unless certain conditions are met. This rapid distribution might result in increased taxes and, thus, less of a benefit for your intended beneficiary.

If you have questions about how the RMD rules impact your distributions or your estate tax plans, please contact our office at your earliest convenience.