August 10, 2009

By Harry C Ballman, MBA, CPA, PFS; Arthur J Dykes, CPA; Donald S Paris, CPA.

The Required minimum Distribution Rules (RMD) that apply to retirement plan withdrawals are waived for tax year 2009 only. Thus, we have recommended to clients who are 70 1/2 years or older, and subject to RMD, to consider forgoing 2009 distributions unless there is some compelling reason for taking the distribution.

RMD rules generally apply to traditional IRAs (Roth IRAs excepted) SEP and Simple IRAs, and other employer qualified defined contribution plan accounts, like 401(k), 403(b), and 457(b). Simply, RMD requires that distributions must commence by April 1 of the year following the calendar year a taxpayer becomes 70 1/2. Or, if later, April 1 of the year following the year of retirement in the case of an employer-sponsored plan if the recipient owns less than 5% if the sponsoring entity.

The obvious benefit of not taking 2009 distributions is that clients can avoid 2009 taxable income and need not invade their already depressed asset values in retirement accounts that will hopefully increase in value in the future. As always, one size does not fit all when applying tax rules. In the cases delineated below we have advised clients to consider some planning opportunities to meet their needs before year end.

  1. Clients are advised that the RMD holiday has flexibility in 2009. The distribution is optional and any amount may be withdrawn down to and including nothing ($0). Because plan participants may take a distribution as late as the last day of the year, it leaves them in a good position to determine what amount of distribution can maximize their tax savings, and not further impair retirement account balances at that time.

  2. One of my clients has very high medical expenses, which exceed the 7 1/2% of Adjusted Gross Income (AGI) floor. We advised them to consider taking a distribution, since much if not all of the income reported from the distribution may be shielded from tax. This may be advantageous since excess medical expenses do not carry forward to future tax years and the benefit of the deduction may be lost if not offset by income in 2009.

  3. Another client has charitable contribution carryovers that are expiring in 2009. We advised them to consider taking a distribution to avoid loss of the tax benefit from this potential deduction.

  4. Yet another client with net operating loss carry forwards were advised to take a distribution to utilize offsetting the taxable income from a pension distribution.

  5. Most clients, regardless of their income level, that will incur payment of 2009 income tax, will most likely decide to forego the 2009 RMD distribution unless the cash flow is required for other reasons. And, with hopefully rising markets they will enjoy an increase in the value of their retirement holdings in the future.

These cases are not intended to be all inclusive. They are just examples of how we applied the rules surrounding RMD to our client’s tax advantage.

Important--Know it can be argued that foregoing a RMD distribution in 2009 can defer the recognition of taxable income to be taxed, at what is currently expected to be, at higher individual income tax rates in future years. This means that putting off this year’s RMD only postpones the tax to a later year. And that later year may be a year where your tax rate is higher, resulting in a higher tax on the same distribution. Thus, it is important that any expected tax saved in 2009 be measured on against the potential tax savings and economic impact on retirement plan assets in future years.

All clients are advised to make this income tax timing decision only after examining all the facts surrounding their personal financial situation , based on a detailed forecast of expected 2009 (and later year) income tax results. It is always advisable to consult a qualified tax/financial professional before deciding if this strategy is right for you.

For more information on this unique one time 2009 tax planning opportunity and specific details of RMDs go to www.IRAHELP.COM, or use a Web search engine for Required Minimum Distributions.