Mandatory IRA/401(k)/403(b) Withdrawals Have Been Eliminated for 2009

Just before Christmas of 2008, the president signed the Worker, Retiree, and Employer Recovery Act of 2008. The bill suspended 2009 Required Minimum Distributions (RMDs) for IRAs, 401(k)s and 403(b)s.

The intent of this change was primarily to give a break to retirees whose account balances probably cratered last year.  Normally, when a person turns 70½, he or she is required to begin withdrawing money from most kinds of retirement plans so that the IRS can collect its share of income tax.  In addition to being taxed as income, the funds removed lose the benefit of tax-free accumulation in the account. Since some people had likely already taken their 2008 distributions before the end of the year, the government decided that it would be too complicated to suspend the 2008 distribution requirement, and instead provided relief for 2009.

The benefits of the bill also extend to some taxpayers who are not retired. Individuals who inherit an IRA are normally required to take RMDs, thus incurring tax liability.  Individuals who would otherwise be required to take a mandatory withdrawal from an inherited IRA also receive a break in 2009 and can thus extend the amount of time that the remaining funds are allowed to grow tax-free.

This is a one-time change, and it’s hard to say whether it will be extended into 2010. It may be that when people begin scrutinizing this tax break, it’ll become apparent that this is a tax break for those retirees who are least in need of tax relief.  That is to say, if you are retired and really need to take money from your retirement plan in order to make ends meet, you’re going to take a distribution in 2009 anyway. Only people who don’t need the money from their retirement plans benefit from this break.  Once Congress figures this out, it probably won’t extend the provision any further.

As always, you should obtain tax advice specific to your situation.  Retirement plan distributions can be complicated, and you should not take an action that affects your taxes without being sure that it is appropriate for you.

About the author

Thomas Fisher, CFP®

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