It’s hard to keep up with all the legislative changes undertaken as the federal government grapples with the recession.
So, on occasion, I’ll be writing about the new laws affecting your pocketbook. You may already have heard about the changes but, hey, it can’t hurt to confirm what you know or think you know.
One change that President George W. Bush signed just before Christmas affects a lot of seniors.
Speir Collins, an 86-year-old reader from Nokomis, Fla., asks: “Have you written about the new law that says retirees do not have to take mandatory withdrawals from their IRA accounts during 2009? If not, I think it would be doing old folks like me a great service to bring this information to their attention.”
Collins is right. Many people may not have heard about this as the law was passed over the holidays. Tucked in the Worker, Retiree and Employer Recovery Act of 2008 signed by Bush on Dec. 23 was a provision that waives any required minimum distributions in 2009 from retirement plans such as 401(k)s, 403(b)s and certain 457(b)s. The distribution rules also apply to traditional IRAs and IRA-based plans such as Simple IRAs and SEPs (simplified employee pension plans), which provide employers with an easy method to make contributions toward their employees’ retirement or, if self-employed, their own retirement.
If you have such a plan, you probably know, or should know, that the government demands you withdraw a portion of your money even if you don’t need it. The first required minimum distribution payment can be delayed until the following April 1 of the year in which you turn 701/2. For all subsequent years, including the year in which the first required distribution was paid, you must take a distribution by Dec. 31.
For many people, the recent rule change is a year too late. With the dive in the stock market last year, many seniors could have used this relief for 2008. The problem is the amount seniors have to withdraw is based on their balances from the previous year. In most cases, their investments have suffered losses since 2007, which means they had to withdraw funds at a low in the market.
Experts have been advising people that if they don’t need money invested in the markets — and they are well diversified — they should ride out the current paper losses in their portfolios. I’m sure many seniors with money in tax-advantaged retirement accounts that have experienced significant losses would like to follow that advice for 2008, but couldn’t because of the IRS rule.
“It would have been a great big help last year,” Collins said. “Everybody is hurting the way the markets have been going.”
Generally, the required distribution that seniors have to take is calculated for each account by dividing the prior Dec. 31 balance of the person’s IRA or retirement plan account by a life expectancy factor that the IRS lists in the tables of Publication 590 — “Individual Retirement Arrangements (IRAs).”
If you have one or more IRAs, you must calculate the required withdrawal separately for each IRA you own. However, you can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) owner must calculate the withdrawal separately for each 403(b) plan, but can take the total amount from one or more of them. Withdrawals required from other types of retirement plans such as 401(k) and 457(b) plans have to be taken separately from each of those accounts.
You have to get this right because if you fail to take out the required minimum distribution, you face a huge penalty. The amount not withdrawn is taxed at 50 percent. The penalty may be waived if you can successfully argue to the IRS that the shortfall in your distributions was due to a reasonable error and that you took steps to remedy the shortfall.
In order to qualify for this relief, you must file IRS Form 5329 and attach a letter of explanation.
I should note that the recent rule change does not waive any 2008 required minimum distributions for individuals who were eligible but chose to delay taking their 2008 requirement payments until this April 1. In other words, let’s say you are a retiree who turned 701/2 in 2008 but wanted to wait until April 2009 to take a distribution. You must still take your full 2008 required retirement payment by April 1. The act does not waive any required payments for 2010.
If you are receiving distributions over a five-year period, you can now waive the distribution for 2009, effectively taking distributions over six years, the IRS indicated in a notice after the enactment of the Worker, Retiree and Employer Recovery Act.
Still confused about this rule change? It would not be surprising.
Either get professional help or call the IRS at 800-829-1040 to make sure you are taking the right distribution.
Washington Post Writers Group
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