01/15/09 - Retirement Accounts Get a Chance to Recover
By: Richard Feldman, CFP®, MBA, AIF®
The government has finally gotten around to helping the individual investor and rightfully so with the world’s equity markets just completing the worst yearly performance since the Great Depression with the Dow down 34%, the S&P 500 down 37% and the NASDAQ down over 40%. The government, in its efforts to allow retirement accounts to recover from this downturn, has established the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) which was signed into law by President Bush on December 23, 2008.
WRERA
The Worker, Retiree, and Employer Recovery Act of 2008 is a combination of technical corrections to the Pension Protection Act of 2006 and new Pension Legislation.
The main item for retirement accounts is the suspension of required minimum distributions (RMDs) for 2009. The issue regarding RMDs is that the amount to be distributed is based on the December 31st market value of the prior year. This means that individuals were required to base their 2008 distribution on the market value of their retirement account as of December 31st of 2007. Most individuals typically wait until the end of the year to take their required distribution so the funds can stay invested for the full year and continue to compound on a tax deferred basis. In 2008, this strategy would have backfired since retirement accounts that had exposure to equities would have been down significantly in 2008 causing the required distribution to become a much larger portion of the overall retirement account.
Required Beginning Date
Individuals are required to start taking mandatory distributions from their retirement accounts by April 1st of the year after turning 70 ½. If an individual turned 70 ½ in 2008, they have the option of taking a distribution in the current tax year or they can wait and take it by April 1st of 2009 which would push the taxation of it into the following tax year. The fact that an individual pushes their 2008 required minimum distribution into 2009 does not make it a 2009 distribution. The distribution would still be a 2008 RMD and would still be required to be distributed by April 1st of 2009. The distribution would be calculated using the December 31st, 2007 valuation for the retirement account.
Inherited IRA and Roth IRAs
Individuals who are the beneficiaries of inherited IRAs and Roth IRAs who are taking distributions over their lifetimes will now be able to stretch out those payments a little longer since there is no requirement to take mandatory distributions in 2009.
Roth IRAs typically do not require mandatory distributions during the owner’s lifetime but beneficiaries are typically required to make them just not in 2009.
72T Distributions
Individuals who have set up a 72T distribution (substantially equal periodic payments) from their IRAs, will find no relief in the legislation. The suspension applies to IRS code section 401(a)(9) distributions which are those after age 70 ½ and not to code section 72(t) distributions which are made before age 59 ½.
Summary
The suspension of Required Minimum Distributions will lessen the tax bite for a lot of individuals next year. The suspension of RMDs will also allow individuals more time to recoup some of their investment losses in their retirement accounts (depending on how the market performs). This might also provide individuals the opportunity to convert a portion of their IRA account into a Roth IRA and still maintain the same marginal tax bracket given the reduction in income due to the suspension of RMDs.
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