Investors are generally required to begin taking annual RMDs from IRAs and retirement plans upon reaching age 70 1/2.  Yet as a result of current market conditions, many investors may be reluctant to take their 2009 mandatory distributions.  In order to provide some relief to investors in this situation, the IRS has ruled that they may postpone their 2009 RMDs (Required Minimum Distributions), or take them and, in most cases, roll them over to an IRA or eligible retirement plan.

Am I Affected?

If you fall into one of the following categories, you are eligible to take advantage of this IRS ruling:

  • You are already taking RMDs
  • You are turning age 70 1/2 in 2009
  • You are a beneficiary of an IRA or retirement plan

What Do I Need to Know?

  • Generally, if you fail to take an RMD, the IRS will assess a 50% penalty on the amount not taken.
  • The IRS has declared that any 2009 RMD (i.e., lifetime distribution that is determined by dividing an account balance by a distribution period) may be suspended without penalty.  This includes RMDs to retirement plan participants and IRA owners, and after-death distributions to beneficiaries.
  • If you have taken your 2009 RMD, but decide that you do not want the distribution, you may be able to roll it over to an IRA or eligible retirement plan.  You must complete the rollover within 60 days of receipt in order to avoid immediate taxation.  IRA and retirement plan distributions are generally taxed as ordinary income.
  • If you are a nonspouse beneficiary of an IRA, you may not roll over a 2009 RMD if you have already received the distribution.  If you do not want your 2009 RMD, you must inform your IRA administrator that you wish to suspend the amount.
  • Your employer may, but is not required to, offer you a direct rollover option of your 2009 RMD from your 401(k) or other retirement plan.
  • If the amount that would have been your 2009 RMD is distributed from your employer’s plan, the usual 20% mandatory federal withholding will not apply

What Action Should I Take?

  • Contact your employer or IRA administrator to discuss what steps, if any, you need to take in order to suspend your 2009 RMD.
  • If your employer or IRA administrator cannot suspend the RMD, talk to your financial advisor about a 60-day rollover to an IRA to avoid immediate taxation.
  • Ask your financial advisor whether an IRA consolidation strategy would make sense for you in order to streamline the RMD process for future years.

Additional Details

  • The average investor owns two or more IRAs.  If you own multiple IRAs and are in RMD mode, determining the correct RMD amount to take each year can be complicated.  Contact your financial planner and discuss ways to ensure that you are satisfying your RMD and effectively avoiding the 50% penalty for noncompliance.
  • Some employer plans and IRAs may automatically distribute the 2009 RMD.  If you have already received or will receive a distribution, you may be able to complete a rollover of the amount within 60 days and avoid immediate taxation.
  • If you turned 70 1/2 in 2008, but chose to delay taking your 2008 RMD until April 1, 2009, you must still take the amount.  You may not suspend this amount or roll it over into a separate account.  The suspension or rollover option only applies to RMDs for 2009.

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