For 2009 only, the required minimum distribution (RMD) rules applicable to retirement plan withdrawals have been waived. This allows retirees to forgo a year’s distributions. The benefit of this suspension may seem obvious: The beneficiary can defer taxable income and hopefully the holdings—likely battered over the past year—can recover before being further depleted. However, beneficiaries should consider some planning opportunities before the suspension expires at the end of this year.
In general, the RMD rules apply to various traditional IRAs (not including Roth IRAs) and defined contribution plans sponsored by employers. They call for distributions to commence by April 1 of the year following the calendar year in which the beneficiary turns 70½ years of age 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% of the sponsoring entity.
The RMD holiday provides some flexibility: Forgoing the distribution is optional; it is not an all-or-nothing provision. The recipient may withdraw any amount, down to and including $0. Because a plan participant may take a distribution as late as the last day of the year, the participant is in a good position to take a distribution that optimizes tax savings.
If a taxpayer has unusually high medical expenses, much of the income resulting from an IRA distribution may be shielded from tax. Excess medical expenses cannot be carried over to another tax year, so the deduction will be lost if not offset.
An individual with charitable contribution carryovers that will soon expire may wish to take an IRA distribution to avoid permanently losing the deduction.
Unlike medical expenses, net operating losses (unfortunately common for 2008 and possibly 2009) can be carried over, but they, too, can partially or fully offset otherwise taxable income resulting from a pension distribution.
A taxpayer whose modified AGI is below the level requiring taxability of Social Security payments may consider withdrawing IRA distributions only to the level that would allow the Social Security payments to remain tax-free.
Taxpayers may find in 2009 that they are subject to maximum tax brackets lower than they are accustomed to due to any number of reasons, including capital losses and diminished interest and dividend income. Although tax rates may change in the future, taxpayers who believe they will be taxed in a higher bracket the following year may want to take some otherwise deferrable RMDs in the current year to trigger tax at lower rates.
Regardless of income level, those who will incur current incremental tax will want a compelling reason for taking distributions that are not necessary. Many people will gladly forgo the 2009 distribution for this reason. With a little luck, they will see the value of their holdings increase before making part of the decline in value permanent by taking a distribution. But for others, the RMD holiday creates a unique opportunity for unusual tax planning; practitioners should make sure clients take advantage of it before the waiver expires at the end of 2009.
For a detailed discussion of the issues in this area, see “Making the Most of the IRA Required Minimum Distribution Holiday,” by Stanley Rose, CPA, in the August 2009 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or e-mail email@example.com for a subscription to the magazine or to become a member of the Tax Section.