IRA’s and other pension plans allow taxpayers to defer income taxes on contributed amounts and earnings until distribution. The deferral does not last forever – under the required minimum distribution (RMD) rules, taxpayers must make certain prescribed minimum distributions each year after age 70 1/2. The RMD for a given year is computed by multiplying a required distribution table percentage against the value of the account at the end of the preceding year.
With the broad investment market declines, many have seen their IRA and pension accounts lose substantial value. For taxpayers that do not need a full RMD, the RMD rules add insult to injury by (a) requiring annual distributions from the accounts, thus further depleting their balances, and (b) possibly causing account holders to sell investments at distressed values to be able to make the distribution.
In a relief measure, Congress has included in the recently enacted Worker, Retiree and Employer Recovery Act (which is expected to be signed into law by President Bush) a provision that waives the requirement for taxpayers to make an RMD in 2009. Therefore, taxpayers who do not need a full RMD distribution in 2009 do not have to make one.
The provisions apply to IRA’s, and many (but not all) pension plans. Individuals withdrawing under a five year method may also get an additional year to make withdrawals.
This is only a one year relief provision – RMD’s must recommence in 2010. Unfortunately, the provision does not apply to 2008 RMD’s – these must still be made in full. Of course, taxpayers who need full RMD distributions for living expenses will not benefit from this provision.