My retired law partner John Sheppard used the phrase “getting the oxcart out of the ditch” to describe his theory on why not to procrastinate tackling difficult problems. Along with the multitude of government bailouts, loans and other measures designed to get our economic oxcart out of the proverbial ditch one of them may actually assist those who are over 70½ and have IRAs or other defined contribution plans, although as I will explain below, the relief is limited, and should have been offered last year.
Those who are owners or beneficiaries of such plans who are otherwise required to take Required Minimum Distributions (RMDs) from their plans may generally leave their money in those plans this year (2009) without suffering any penalty for the failure to withdraw. This relief has been provided under the Worker, Retiree and Employer Recovery Act of 2008, passed by Congress on December 11, 2008.
While the relief applies to participants in and beneficiaries of IRAs, SEP-IRAs, SIMPLE IRAs, 401(k) plans, money purchase plans, profit sharing plans and other defined contribution retirement plans, the relief does NOT apply to defined benefit plans. Also, the relief currently only applies to RMDs for 2009.
The reasoning behind this relief is that many of us have suffered losses in our retirement plan accounts. By forcing RMDs, retirees are forced to sell assets from within the retirement accounts and to decrease the amount that may continue to grow tax deferred.
True relief would have suspended distributions last year, since the RMDs are calculated on January 1st balances. Most of the losses suffered during 2008 came in the 3rd quarter, so those that hadn’t taken their RMDs by the time the stock market tanked ended up with RMDs that constituted an even larger percentage of the retirement account.
An example illustrates my point. Assume Larry, age 75 had an IRA worth $100,000 as of December 31, 2007. He hadn’t taken his RMD by December, 2008. Larry’s IRA decreases 40% to $60,000. His RMD for 2008 is $4,367 ($100,000 divided by 22.9 years, the factor under the Single Life Table the IRS uses to calculate RMD). His 35% federal tax works out to $1,528. That tax is 1.53 percent of the December 31, 2007 value when the RMD was fixed in stone under the law. But now that same tax is 2.55 percent of the December $60,000 IRA value. Uncle Sam is taking 167% more of the account than would have been the case had the economic and stock market crisis not occurred.
My take on this is the RMD relief came too little, too late. Consider that the RMD relief rules provide no benefit for those who actually need to use their IRAs to support their own retirements. The primary beneficiaries of the RMD relief package are those who have sufficient other assets or income to not take any RMDs for 2009.
But for those of you who may benefit from the rules, consider using them. As always, consult with your own advisors before acting.
©2009 Craig R. Hersch .Learn more at www.sbshlaw.com