Required Minimum Distributions: Back for 2010
One of the government's surprise tax relief measures in response to the crash of 2008 was to offer a one-time waiver of required minimum distributions calculated for 2009. The waiver affected participants who turned 70½ in 2009, participants who receive minimum distributions each year, and some beneficiaries. The waiver did not apply to defined benefit plans.
Generally, required minimum distributions (RMDs) must begin by April 1 of the year following the year in which a retired participant attains age 70½. Once RMDs commence, the distributions must be made by the end of each calendar year. Employers have an extra three months to make the initial payment only. The rules apply to defined contribution plans, IRAs, and individual retirement annuities.
Effects of the Waiver
Participants who receive RMDs could opt out of the 2009 distribution. However, distributions resume for 2010 and must be made by December 31, 2010. The 2010 RMD is calculated as usual. To calculate the RMD for IRAs and defined contribution plans, the participant's account balance on December 31, 2009 is divided by the life expectancy factor in the Uniform Lifetime Table in the Regulations at §1.401(a)(9)-9 for the participant's age in 2010. Special rules apply to annuity contracts. If a participant did not opt out for 2009, a 2009 RMD may be made between 1/1/2010 and 4/1/2010, and it is eligible for rollover and subject to 20% mandatory withholding.
Beneficiaries receiving a five year payout have an extra year to complete the payout from their inherited account if one of those five years is 2009. Beneficiaries receiving a lifetime payout that began before 2009 can omit the 2009 distribution and resume in 2010.
- If a participant turned 70½ in 2009, no distribution was required for 2009. If not for the waiver, his required beginning date (RBD) would have been April 1, 2010. His new RBD will NOT be delayed for a year. His first distribution must be made by December 31, 2010.
- A participant reached age 70½ in 2008 and thus her RBD was April 1, 2009 for her 2008 distribution. She opts out of her distribution for the calendar year 2009. Her 2010 distribution must be made by December 31, 2010.
The waiver has no effect on participants who reach age 70½ in 2010. Their RBD is April 1, 2011. If you take advantage of the initial three month delay, you must make two RMDs in 2011, the first by April 1, and the second by December 31.
If an individual has several IRAs, he can generally add the balances together and take the required distribution from just one. This is not true for 401(k) and 403(b) plans. If an individual has money in several plans from previous employers, distributions must be taken from each one – a good reason to combine them.
When calculating a RMD from the IRS tables, remember that account value "springs back" to December 31 of the previous year, but age "springs forward" to the current year.
If you have questions, or for more information on this topic, contact Elizabeth J. Hitchcock.