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January 1, 2009
RETIREMENT TAX REPEALED
On December 23, 2008, President Bush signed into law the Worker, Retiree, and Employer Recovery Act of 2008. This law temporarily repeals, for 2009, the 50% tax for retirees who do not take the Required Minimum Distribution (RMD) from their IRA accounts, 401(K) plans and similar retirement accounts.
The reason behind this change is the continuing downturn in our economy that has caused the value of many retirement plans and IRA’s to plummet. Under the existing rules, those subject to the RMD, would be forced to further deplete their IRA’s and qualified retirement plans at a time when the current recession/depression has reduced the value in these accounts to all time lows. The hope is that by the year 2010, the economy will have turned around and restored the values of your IRA.
This law affects everyone who is age 70 ½ by December 31, 2008, and have an IRA account, 401(K) plan, or similar retirement account. These are the people who are subject to the Required Minimum Distribution (RMD) rules.
What is RMD? The Required Minimum Distribution rules say that once you turn age 70 ½ , you must start taking distributions from your IRA by April 1 of the following year. Failure to take the distribution makes you subject to a 50% excise tax on the amount you were required to take. The RMD is calculated by dividing the value of your account as of December 31 of the prior year and dividing it by your life expectancy.
The law change only affects distributions for the year 2009. By now, you will have already received your 2008 minimum distribution and it will be business as usual in preparing your 2008 income tax return. If you want to skip receiving your 2009 RMD, you should contact the financial institution that holds your retirement account and inform them of such.
This law change only benefits people who don’t really need the money. By this, I mean that for those of you who need your annual IRA distribution to get by financially, there is no change in how you will be taxed on the distribution. The only people who will benefit are those who have sufficient income and assets to allow the funds to remain in their IRA account, and hopefully grow, when the stock market rebounds.
This is the first, in a series of expected tax legislation to be passed and signed into law by the President. Congress is expected to pass a large economic stimulus package in January and there will likely be further tax relief for retirement plans in 2009. I’ll try and keep you up to date as they are passed.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Friends of the Saugus Senior Center and is a member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org