New law offers retirees financial flexibility

Thanks to the Worker, Retiree and Employer Recovery Act of 2008, anyone who would otherwise be required to take a minimum distribution from a retirement account can skip this year’s withdrawal. The standard 50% penalty for not taking the required minimum distribution is being waived for all qualified plans — 401(k), 403(b) and 457 plans, as well as individual retirement accounts.

Because this law was enacted in late December, it escaped the notice of many people.

What’s more, even those who have heard of this one-year RMD suspension may not fully understand how it applies to them.

Although it is true that seniors who rely on their annual required minimum distribution for income won’t be able to take advantage of this exemption, those who don’t need the money or who prefer to leave their assets invested will welcome this free pass, if only for its unexpected tax break in the form of not having to pay income tax on the mandatory withdrawal. This reduces the chances of being pushed into a higher marginal tax bracket or having to pay taxes on a higher percentage of Social Security income.

CORE BENEFICIARIES

The core beneficiaries of the new law are retirement account owners who have reached their “required beginning date,” which is April 1 of the year following the year they turn 701/2.

Those who have their annual IRA withdrawals sent to them automatically must act quickly if they want to suspend this year’s withdrawal.

Those who celebrated their 70th birthday between July 1, 2007, and June 30, 2008, are required to take their first required minimum distribution no later than April 1, making that their 2008 required minimum distribution. Because of the new law, they don’t have to take their 2009 withdrawal, which ordinarily would be required before Dec. 31.

However, if their 70th birthday fell on or after July 1, 2008 (but not later than June 30, 2009), their first RMD year would be 2009.

At the latest, they normally would have to take their 2009 required minimum distribution by April 1, 2010. This year, they can skip it, but they still must make a 2010 required minimum distribution, of course, and the deadline for that is Dec. 31, 2010.

In addition to retirees, the RMD holiday applies to anyone who has inherited a retirement account — children, grandchildren, parents, siblings, an unmarried partner or a trust.

For example, if a plan beneficiary is taking annual distributions based on their own life expectancy, they can forgo this year’s withdrawal. Or if they planned to empty dad’s IRA by the end of the fifth year after his death, for example, they now have an additional year to do so.

Note that while there is never a required minimum distribution for a Roth IRA — no matter the age of the owner — a non-spouse beneficiary who has inherited a Roth is subject to the RMD rules, and the ability to skip this year’s withdrawal also applies to them.

All isn’t necessarily lost if someone receives an RMD check and wishes he or she hadn’t; the distribution can be undone, but action must be taken quickly.

The distribution must be rolled back into the account from which it came or into another retirement account within 60 days, and the retirement plan involved must allow this. In the case of an IRA, re-depositing a required minimum distribution is an option only if the account holder didn’t roll over funds from or into this account in the previous 12 months.

One final note: The option to skip a 2009 required minimum distribution doesn’t affect the ability to make a charitable donation to a qualified charity from an IRA. This proviso was extended through 2009 as part of the Tax Extenders and AMT Relief Act of 2008.

It is available only to IRA owners who have reached their required beginning date and must be completed via a direct transfer from the IRA custodian to the charity. The maximum amount is $100,000.

Even though the charitable contribution doesn’t count toward fulfilling a retiree’s 2009 required minimum distribution, be-cause there is none, it should still be considered in terms of the tax advantages.

As the donation isn’t considered a “distribution,” it isn’t included in donors’ gross income. Thus it can’t push them into a higher tax bracket.

In addition, it won’t affect the taxation of Social Security benefits, which means that this provision can be helpful to seniors with modest income.

Gail Buckner is a Pittsburgh-based certified financial planner, retirement and financial planning specialist with Franklin Templeton Investments of San Mateo, Calif.

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