By Mary Ellen Schill
December 29, 2008
In an effort to minimize tax and financial burdens associated with IRAs and certain retirement plans (1) in current market conditions, Congress recently passed, and on December 23, the President signed into law, the Worker, Retiree, and Employer Recovery Act of 2008 (the Act). Two components of the Act, which are summarized below, provide IRA owners and qualified retirement plan participants (and their beneficiaries) with additional estate and tax planning opportunities starting next year.
The most significant change made by the Act is the suspension of the Internal Revenue Code’s “required minimum distribution” requirement for IRA and qualified retirement plan distributions which would otherwise be required for 2009. This change is expected to help those who have watched their accounts shrink significantly over the past year. The required minimum distribution rules require that an individual must start taking distributions from his or her account upon attainment of age 70 1/2 (for IRA’s) and the later of termination of employment or age 70 1/2 (for qualified retirement plans). The timing of required distributions to beneficiaries of inherited accounts depends on whether the beneficiary is a spousal beneficiary and the age of the account owner when he or she dies. The penalties for not withdrawing the required minimum distribution are severe- an excise tax equal to 50% of the amount not withdrawn. The suspension means that no required minimum distributions need to be made for 2009.
The suspension of the required minimum distribution rules also apply to beneficiaries who have inherited their IRA accounts or were designated as beneficiaries of qualified retirement plan accounts. Thus, under the Act, beneficiaries of inherited accounts will not be required to take a minimum distribution during 2009.
In addition, the suspension applies to non-spouse beneficiaries who under the normal rules must liquidate their inherited accounts (or qualified plan accounts) within five years of the owner’s/participant’s death. In those cases, 2009 essentially does not exist. For example, the Act gives a beneficiary who would otherwise be required to withdraw any remaining funds in an inherited account in 2009 until 2010 to make their withdrawal.
The individuals who will benefit the most from the Act’s suspension of the required minimum distribution rules for 2009 are retirees and beneficiaries who do not need to rely on the required minimum distributions for living expenses, and who would prefer to have their investments recover within a tax sheltered vehicle like an IRA or qualified retirement plan. By leaving money in their accounts, these individuals will end up with less taxable income for 2009 and can, ideally, watch their accounts recover in 2009.
While the Act did give the Treasury Department the authority to suspend required minimum distribution requirements for 2008, the Treasury Department has indicated that it does not believe that such retroactive relief is necessary. Therefore, the suspension does not apply to required minimum distributions for 2008, but payable in 2009 – an individual who turned 70 1/2 in 2008 must still receive his or her first RMD for 2008 by April 1, 2009.
The Act also makes numerous technical changes to prior law. Perhaps the most important of these changes affects non-spouse beneficiaries of qualified retirement plan accounts. Prior to the Act, the ability of non-spouse beneficiaries to rollover qualified retirement plan accounts to their own accounts was limited, because, the law allowing such rollovers was not mandatory, and some employers did not amend their qualified retirement plans to allow them. The Act changes prior law to say that, for plan years beginning after January 1, 2009, company sponsored qualified retirement plans must offer non-spouse beneficiaries a rollover option. Thus, beginning January 1, 2010 for calendar year plans, non-spouse beneficiaries of qualified retirement plan accounts will have additional income tax planning opportunities.
If you have any questions regarding the impact of the Act on an IRA or retirement plan account you own or have inherited, please feel free to contact Mary Ellen Schill, the author of this article, or any of the attorneys in the Trusts & Estates Practice Group of Ruder Ware.
* This is article has been updated from the earlier posted article.
1) The Act applies only to IRAs, 401(k) plans, profit-sharing plans and other defined contribution retirement plans (plans where benefits are not predetermined). The Act does not apply to defined benefit plans (plans where your employer promises a monthly benefit prior to retirement).
This document provides information of a general nature regarding legislative or other legal developments, and is based on the state of the law at the time of the original publication of this article. None of the information contained herein is intended as legal advice or opinion relative to specific matters, facts, situations, or issues, and additional facts and information or future developments may affect the subjects addressed. You should not act upon the information in this document without discussing your specific situation with legal counsel.
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