Retirees benefit from 2009 distribution exemption

DES MOINES, Iowa — Hundreds of thousands of retirees have more money in their accounts thanks to a one-time waiver of a government required withdrawal that kicks in after age 70.

Investment advisers say it’s saved tens of thousands of dollars for many by allowing them to keep their money invested as the stock market began to recoup some of its losses.

A law passed last year temporarily lifted the mandated withdrawals, called required minimum distributions, for those who are 70½ this year or older. The aim was to prevent retirees from being forced to withdraw money from accounts hit hard by falling stock values.

“It turned out to be an extraordinarily helpful thing the government did,” said Steven Schwartz, a financial adviser and founder of Wealth Design Services in Rochester, N.Y. “It really saved a lot of people a lot of money.”

DEFINING THE RMD

The RMD is a federal rule designed to ensure the government, at some point, is able to tax retirement account funds, which have been growing tax free.

It applies to IRAs and employer sponsored retirement plans including 401(k)s and profit sharing plans. Roth IRAs are not included because contributions to these accounts have already been taxed.

Retirees, who might not otherwise take money from their accounts for living expenses, at 70½ must begin taking a specified amount of money out to pay taxes on their untaxed holdings. Failure to do so results in a 50 percent penalty on the amount that should have withdrawn.

The required distributions are calculated based on the account balance and the life expectancy of the account holder as determined by IRS actuary tables.

Numerous Web sites offer RMD calculators. The Financial Industry Regulatory Authority offers a simple one at: apps.finra.org/Calcs/1/RMD

WHAT THE ONE-YEAR WAIVER MEANS

President Bush signed the Worker, Retiree and Employer Recovery Act in December 2008, which waived the RMD for this year only. That was at the height of the financial crisis as the stock market plummeted in response to bank failures and broader economic worries.

If the RMD waiver had not been enacted, retirees would have been forced to pull money out of invested accounts based on year-end 2008 balances, when stock prices were near the bottom.

The S&P 500 dropped 38 percent from Dec. 31, 2007, to Dec. 31, 2008. It fell even further until bottoming out in March. Since then, the index has risen nearly 57 percent.

Lifting the RMD for this year has reassured some retirees by not forcing them to realize losses on their investments. For example, someone with a $100,000 account and a required distribution of $10,000, may have saved as much as $14,000, said Dean Kohmann, vice president of 401(k) plan services at Charles Schwab Corp.

Many will also benefit by not taking the required distribution because their taxable income will be lower, and they may not have to pay taxes on their Social Security income for the year.

The IRS says about a third of Social Security recipients earn enough to pay income taxes on the benefits.

Now that the recession’s end may be in sight and markets are edging up, there seems to be little interest in extending the waiver another year. That may be in part because the RMD brings in significant revenue for the government, although the IRS says it can’t say how much exactly.

The Investment Company Institute, a trade group, says more than $7 trillion is held in IRAs or employer-sponsored retirement plans, most of which must comply with RMD rules.

Among IRA owners, about 64 percent said they took money out of their accounts in 2008 only to meet the RMD requirement.

There have been efforts in the past to change the RMD rules. Opponents of the mandatory withdrawals believe it places too much burden on retirees who frequently also face higher health care costs and other expenses.

Changes, most recently proposed in the late 1990s, would have increased the age to 78 from 70½. Other proposals would have exempted RMDs for accounts under $300,000.

“Anytime you’re not required to take the money out, that’s a good thing,” said Daniel Morris, a San Jose, Calif., accountant with Morris & D’Angelo. “You don’t have to pay the tax on it and it has an opportunity to float with the market, which will hopefully be more up than down.”

RMD RESUMES IN 2010

The next RMD will based on account balances as of Dec. 31, 2009. For those who turned 70½ this year and would have taken their first distribution, they must do it by Dec. 31, 2010.

IRA and 401(k) account administrators typically manage required distributions and send notices about the withdrawals, but the IRS holds the account owners responsible for ensuring the distributions are taken on time.

The best advice is to understand the basics of the RMD and as you approach 70½ and discuss the mechanics of how you want the distribution handled every year with a financial adviser or accountant.

If you had an automatic withdrawal set up and your RMD was taken out this year, the IRS has recently issued rules that allow you to roll the money back into an IRA, basically a do-over, said Schwab’s Kohmann. But you’ll need to act quickly, the deadline in Nov. 30.