United States: Required Minimum Distribution Rules Suspended For 2009 For IRAS And Other Defined Contribution Plans

Last Updated: February 15 2009
Article by Proskauer's Personal Planning Practice Group

On December 23, 2008, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 (H.R. 7327) (the "WRER Act"), which provides that owners and beneficiaries of IRAs and other defined contribution plans who are required to take required minimum distributions ("RMDs") from their plans in tax year 2009, will generally be able to leave their money in their plans (hopefully to grow) without suffering any penalty for failure to withdraw. The normal rules still apply for 2008.

Background

Employer-provided qualified retirement plans and individual retirement accounts and annuities (IRAs) are subject to RMD rules. RMDs generally must begin by April 1 of the calendar year following the calendar year in which the individual reaches age 70 ˝. RMDs are generally based on the joint life expectancy of the IRA owner and his beneficiary. For IRAs and defined contribution plans, the RMD for each year is determined by dividing the retirement account balance as of the end of the prior year by a distribution period, which is found in an IRS-supplied life expectancy table. For instance, an individual's 2008 RMD is determined by reference to such individual's account balance on December 31, 2007 divided by the joint life expectancy of the individual and his beneficiary found in the IRS table.

Failure to make a RMD triggers a 50% penalty tax calculated against the RMD that should have been distributed in that particular year.

Under the WRER Act, no RMD is required for 2009 from IRAs and retirement plans that are defined contribution plans (within the meaning of IRC Section 414(i)). Thus, any annual minimum distribution for 2009 from these plans required under current law, determined by dividing the account balance by a distribution period, is not required to be made. The next RMD would be for calendar year 2010. These provisions apply to life-time distributions to IRA owners and employees as well as to after-death distributions to beneficiaries.

Technical Requirements

The WRER Act applies to defined contribution plans described in IRC Section 403(a), 403(b) and 457 (eligible deferred compensation plan), and individual retirement plans. Thus, these provisions provide relief to participants in and beneficiaries of IRAs, SEPIRAs, SIMPLE IRAs, 401(k) plans, money-purchase plans and profit-sharing plans. The WRER Act does NOT apply to defined benefit plans.

If an individual dies before his required beginning date (generally April 1 of the year after the year he turns age 70 ˝), there are two methods for satisfying the after-death RMD rules – the life expectancy rule and the "5-year rule". Under the life expectancy rule (which is generally more favorable because distributions are made over a long period), the RMD for each year is determined by reference to the beneficiary's life expectancy. Under the 5-year rule, the deceased individual's entire account must be distributed no later than December 31 of the calendar year containing the fifth anniversary of the individual's death. For instance, if an individual dies on July 1, 2005, under the 5 year rule, his entire account must be distributed by December 31, 2010.

For IRA owners that die before reaching age 70 ˝ and who have not designated qualified beneficiaries (usually this results because they name their estate as the beneficiary of their IRA), their estate or heirs generally are subject to the 5 year rule, meaning that they have 5 years to take distributions from their IRAs. Under the WRER Act, the 5-year period is determined without regard to calendar year 2009 – the period is extended by one year, automatically.

Since the WRER Act is only effective for 2009, it does not apply to any RMD for 2008 that is permitted to be made in 2009 by reason of an individual's required beginning date being April 1, 2009. This would apply to individuals who turned age 70 ˝ during 2008.

Examples

  1. Individual attains age 70 ˝ in 2008. John turned 70 ˝ on July 1, 2008. Although John is required to take a RMD for 2008, since it is his first year of RMDs he is allowed to defer the 2008 distribution until April 1, 2009. Since this is still considered a 2008 distribution, John must take his distribution by April 1, 2009.
  2. Individual attains age 70 ˝ in 2009. John turned 70 ˝ on July 1, 2009. Before the WRER Act, the first year for a RMD is 2009, and John's beginning date would be April 1, 2010. Under the WRER Act, no distribution is required for 2009 and thus, no distribution need be made before April 1, 2010. However, John's 2010 RMD must be made on or before December 31, 2010.
  3. 5-year rule. Jack died in 2007. The beneficiary of his 401(k) elected to take under the 5-year rule. Under the WRER Act, the 5-year period ends in 2013 instead of 2012.

Comment

IRA owners and beneficiaries may not want to withdraw assets from retirement accounts at this time because they may need to sell stocks and bonds at a depressed price in order to access their funds. The hope is that the market will rebound by 2010, at which time it would be more logical to sell the stocks and bonds to meet the RMDs.

However, the WRER Act does not provide any relief for 2008 RMDs. For most IRA owners and beneficiaries, the problem is that they had to take their 2008 RMD that was computed on a higher value (i.e., value of retirement account on December 31, 2007) out of a possibly depleted account (i.e., $100,000 value on 12/31/07 may now only be worth $60,000).

In addition, the WRER Act does not provide relief for those persons who actually need to use their IRAs and retirement accounts for their support – in these cases the individuals will still take distributions regardless of the suspension of the RMD rules.

Consequently, the primary beneficiaries of the RMD relief rules of the WRER Act are individuals who have sufficient other income or assets that they do not need to take any withdrawals from their retirement accounts in the first place.

Finally, for people facing the distress of a significant decline in assets, any retirement relief is welcome. Tax planning opportunities emerge out of this law by simply providing people with the flexibility to choose whether to take distributions from retirement accounts in 2009, rather than being required to do so as a result of the RMD rules.

www.proskauer.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Proskauer's Personal Planning Practice Group
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.