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RMD suspension: Is there much value≠

By: David Sanza//May 4, 2009

RMD suspension: Is there much value≠

By: David Sanza//May 4, 2009

Millions of Americans have seen the values of their retirement accounts shrink as investment markets teeter in response to the economic crisis.
Especially hard hit are retirees who have taken withdrawals from their accounts, since liquidating investments to fund withdrawals can mean turning paper losses into real losses that may never be recovered.
New law
The Worker, Retiree, and Employer Recovery Act of 2008, enacted in December, provides a measure of relief by temporarily waiving “required minimum distributions” (RMDs) from tax-deferred retirement accounts — including 401(k)s, 403(b) tax-sheltered annuities, 457(b) governmental plans, individual retirement accounts and others. The waiver applies to RMDs for 2009 only.
The RMD amount usually is determined by dividing the account balance as of the end of the previous year by a distribution period, generally a number from a uniform lifetime table.
In most cases, the deadline for an account owner’s first RMD is April 1 of the year following the year in which the owner turns 70.5. RMDs for each subsequent year must be taken by Dec. 31 of that year.
Under the new law:
· Individuals who turn age 70.5 in 2009 will not be required to take their first RMD — technically, the RMD for 2009 — by April 1, 2010. Instead, the first RMD will be for 2010, and the deadline for taking it will be Dec. 31, 2010.
· Individuals who already have started to take RMDs may skip their 2009 RMD. RMDs will resume for 2010, and must be taken by Dec. 31, 2010.
(Taxpayers who turned 70.5 in 2008 still were required to take their first RMD by April 1, 2009.)
Does it help≠
Under the tax law’s RMD rules, individuals generally must withdraw a minimum amount of money from their accounts annually after reaching age 70.5 or pay a 50 percent tax penalty on the amount that should have been withdrawn but wasn’t.
The RMD rules are intended to ensure that income taxes are eventually paid on the money accumulated in tax-deferred retirement accounts. Beneficiaries who have inherited tax-deferred accounts also are subject to minimum distribution requirements.
By eliminating the 2009 RMD, the new law gives some leeway to individuals who can afford to leave their retirement savings invested. If they choose not to take money from their accounts, they’ll avoid the income taxes that otherwise would be due on distributed amounts. Not taking a distribution will lower their 2009 adjusted gross income (AGI), which may lessen the effect of AGI-based restrictions on certain tax benefits.
Overall, those seem like some nice “relief” provisions, but how much relief do they really accomplish≠ The original “suspend RMDs” discussion concerned relief for the 2008 tax year, when retirees complained that RMDs were calculated using the Dec. 31, 2007 account balance, and due to market declines the withdrawal seemed “excessive” relative to the balance after heavy stock market declines. RMD relief was designed to keep seniors from being forced to take withdrawals and incur “unnecessary” income taxes, and from selling out during a market decline.
In the end, the economic value of the relief provision seems somewhat limited. It might have been slightly more helpful had it been enacted for 2008. Unfortunately, administrative and other complications of a quick year-end enactment meant 2008 relief just wasn’t feasible. In terms of the 2009 relief itself, many clients could recover a similar or greater economic value simply by taking more time to analyze the costs of the investments they own, take other basic tax planning steps, review their budget and trim expenses or any number of other options. There is no actual economic value to an individual who actually uses a retirement account to fund retirement expenses. Withdrawals still occur simply because they’re necessary for the owner’s cash flow.
The RMD waiver actually only creates economic value for those with sufficient wealth, enabling them to avoid withdrawals, either due to the availability of other assets or other income sources such as Social Security, pensions, etc.
Sadly, there is little to no value for those actually in the greatest danger of depleting greatly reduced retirement account balances.
David Sanza is a client relationship manager for EPIC Advisors Inc., a full-service retirement plan service provider with emphasis on 401(k) plans. Offices are located at 150 State St., Suite 200, Rochester, N.Y. 14614; (585) 232-9060; and www.401k

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