New rules on retirement-account withdrawals
In late December 2008, one of the last pieces of legislation signed by the Bush administration made dramatic, tax-saving changes in the rules covering Required Minimum Distributions, or RMDs, from IRAs and other retirement accounts.
The Worker, Retiree and Employer Recovery Act included a provision that waived the requirement for minimum distributions in certain retirement accounts for the year 2009. This waiver applies to IRAs, 401(k)s 403(b)s and certain 457 plans, but not defined benefit plans. It also applies to inherited IRAs, when beneficiaries are taking required distributions based upon their life expectancies.
Since the penalty for not taking the required amount correctly can be as much as 50 percent, it is important to understand exactly how the rules apply. For those individuals whose first year for required distributions was 2008, and put of the distribution, as they are permitted to do, until April 1, 2009, this distribution is not waived. It is considered a 2008 distribution, and still must be taken before April 1, 2009.
If you are withdrawing from your IRA or retirement accounts for current income, and all your assets are in retirement accounts, this change will not have impact. However, if you are using less than the required minimum, and have had to take additional withdrawals at the end of the year to come up to the required amount, now you need only take the actual amount you use for expenses.
The most intriguing possibilities for savings with this rule change involve those who have both retirement accounts and individual, trust or joint accounts, and have been relying on the retirement accounts for spending income. By evaluating the proportion of funds among retirement and non-retirement accounts, it may be possible to take income for expenses in 2009 from non-retirement accounts instead of IRAs. This can dramatically reduce income taxes.
Here’s an example. Mr. Wilson has an $800,000 IRA and a $400,000 personal account. His required minimum distribution, which he uses as a part of his living expenses, would total $31,250 for 2009, based upon his 12/31/2008 IRA valuation. He really only receives $23,437, a little less than $2,000 month, since the balance, $7,812, is paid in as federal and state income tax at a combined rate of 25 percent.
For 2009, Wilson can discontinue his scheduled IRA distributions, since the new law does not require them this year. Instead, he can begin to withdraw the actual amount he is spending, $23,437, from his personal account. Since taxes are paid on interest, dividends and capital gains from the personal account regardless of whether the money is withdrawn, he has been able to reduce his taxable income by the full amount of what the required minimum distribution would have been, $31,250, a very signif-cant tax savings, without impacting his lifestyle.
Remember that each individual’s situation is diferent; you should always review any decision that has tax consequences with your CPA or tax advisor. However, in the challenging investment environment we face it makes sense for income-oriented investors with IRAs to take full advantage of the tax advantages of this waiver.
Steven Weber and Elizabeth Loda are investment ofcers of the Bedmin-ster Group, a fee-only advisor providing investment and fnancial counsel to clients in the Lowcountry since 1997. The information contained herein was obtained from sources considered reliable. Their accuracy cannot be guaranteed. In addition, this is not a solicitation to buy or sell any securities. Furthermore, the opinions expressed are solely those of the author and do not necessarily refect those from any other source.
