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Required Minimum Distributions Suspended for 2009

On December 23, 2008, Congress signed into law the “Worker, Retiree and Employee Recovery Act of 2008.” This law allows individuals who would normally be required to take a minimum distribution for the 2009 tax year to skip the distribution completely. This applies to individuals over 70-1/2 years of age and all beneficiaries. There are a few things to keep in mind about this law though.

First, individuals who turned 70-1/2 in 2008 are still required to take the distribution for 2008 by April 1, 2009.

Second, if someone inherited an IRA in 2008, they would normally have to take their first distribution by December 31, 2009 in order to preserve their ability to take future distributions based on their own life expectancy. Thanks to this law, though, the distribution can be delayed until December 31, 2010 without consequence.

Third, if a beneficiary inherited an IRA within the last five years and is required to take a full distribution by the end of the fifth year, they can simply add one year to their required distribution time period. For example, let’s assume a beneficiary inherited an IRA in 2005 and would normally be required to take a full distribution by the end of the fifth year, which in this case would be by December 31, 2010. Because of the new law, they can simply add one extra year and effectively postpone the final distributions, for a maximum of six years. In this example, the final distributions can be postponed until December 31, 2011. (If you are not sure what your required minimum distributions are, please review my blog article, “Inherited IRA“).

What happens if you have already taken your distribution and now realize you didn’t have to? Is there anything that can be done? The answer is “maybe”—but it depends on how much time has passed since the funds were distributed.

If it has been less than 60 days since you’ve taken your distribution, you will be able to put the funds back via an IRA rollover as long as you haven’t rolled over these same funds within the last 12 months. What if you don’t qualify for the IRA rollover treatment? You may still be able to convert these funds into a Roth IRA, but certain qualifications must still be met.

As a final thought, I believe that although Congress tried to give the impression of “having a heart,” it was a little too late. The reason this law was supposedly enacted was to help individuals preserve what was remaining in their IRAs after they had taken a beating in the market. Keep in mind though that the required minimum distributions are based on the balance of the IRA on December 31 of the previous year. Therefore, your 2009 distribution will be based on the balance of your IRA on December 31, 2008.

Since the distributions that have been suspended for 2009 would have been based on the December 31, 2008 balance, the natural question is, where was the market at that time? A quick review of the charts shows that the Dow Jones Industrial Average closed at 8,776. Here is the problem, though. On December 31, 2007, the Dow closed at 13,264 which means that it lost 33.8% of its value in 2008. Therefore, if you waited until the last minute in 2008 to take your required distribution, you would have been required to calculate that distribution based on the December 31, 2007 balance which was 33.8% higher.

Let’s put some actual numbers to it so the effect becomes clear. Let’s assume an 80-year old individual had an IRA balance of $100,000 on December 31, 2007. According to the minimum distribution tables, the required minimum distribution would be $5,347 or 5.347%. But if the IRA owner had delayed their distribution until the last minute, the IRA balance would have been 33.8% lower with an end-of-year value of $66,200. Because the required minimum distribution would remain at $5,347, the effective withdrawal rate is well over 8% of the IRA balance!

By the end of 2008, the damage to the IRAs had already been done. If Congress would have created a way to tie the minimum distribution suspension to the December 31, 2007 IRA balance, it would have been much more beneficial to the IRA owners.

This is why I say it was a little too late.

 

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