Seniors hoping that they wouldn't have to withdraw money from their depleted retirement accounts before their portfolios recover have run out of time. A law signed December 23 by President Bush and passed by both houses of Congress this month will allow retirees to avoid making withdrawals from 401(k)'s or IRAs in 2009, but seniors need to take withdrawals this year by December 31 or face a stiff tax penalty. Here is a look at the latest tax changes for required minimum distributions.
Do I have to take a required minimum distribution this year?
Yes. The Worker, Retiree, and Employer Recovery Act temporarily suspends an excise tax levied on seniors who fail to take a required minimum distribution from their retirement accounts in 2009, but not for 2008. The Treasury Department and Internal Revenue Service considered suspending the penalty for 2008 but ultimately decided against it. Kevin Fromer, the Treasury's assistant secretary for legislative affairs, wrote in a letter to Congress, "All individuals who are subject to required minimum distributions for 2008 should take their distribution under the existing rules." At what age am I required to make withdrawals from my IRA?
Retirees over age 70½ must take required minimum distributions by December 31. "If people have not taken their distributions this year, they are going to want to hustle," says Joshua Itzoe, principal of Greenspring Wealth Management in Towson, Md. "You don't want to wait until the last business day of the year because it may not get proceeds in time." The year you turn 70½, you have until April 1 of the following year to take your distribution. Traditionally, account holders who wait until the following year to take their first withdrawals have to take two distributions in the same year. That could bump you up to a higher tax bracket. But since the 2009 RMD is suspended, retirees who turned 70 1/2 this year may want to consider waiting until April and hoping that their investments recover some value before taking the distribution. "If for some reason your income is going to be higher this year than it is next year, then maybe you want to push off your distribution until 2009," says Itzoe, who is also the author of the Fixing the 401(k) blog. "If your income is going to be higher next year, then it makes sense to take your 2008 distribution now."
How much do I have to withdraw?
The amount seniors must withdraw is based on the Dec. 31, 2007, account balance divided by life expectancy as determined by the IRS. The rub this year is that most Americans' retirement accounts have significantly declined in value since last year. "What was for many people a sum of money that was going to last them the rest of their lives now may be down 20 to 40 percent," says John Curry, head of individual retirement services for AllianceBernstein Investments in New York. Retirees must take withdrawals from diminished accounts that haven't had a significant amount of time to recover from market losses. "What was once an RMD is now quite a lot," says Curry. "An RMD will now help facilitate the depletion of your assets." What happens if I don't make the withdrawal in time?
Retirement savers who fail to take their required withdrawal pay an excise tax of 50 percent of that amount plus income tax. So, if you are required to redeem $4,000 from your IRA and fail to do so, the IRS claims $3,120: a $2,000 excise tax for failing to make the required withdrawal and $1,120 more for income tax you should have paid on the withdrawal, assuming you are in a 28 percent tax bracket. It is a severe penalty worth avoiding. If you withdraw only part of the RMD, you pay the excise tax on the portion you failed to withdraw. For example, if you have an RMD of $10,000 and you took $5,000 out of your account, you owe a penalty of $2,500 plus income tax.
Do I need to make a withdrawal from each retirement account individually?
If you have multiple IRA accounts, you must include all the IRA balances in your RMD calculation, but you don't have to take money out of each one. You can choose to make a withdrawal from a lower-performing account or an account with higher fees to improve your nest egg overall.