401(a)(9) relief for 2009?

[Kathy]

Am I reading the bill that Congress passed correctly?

If a more than 5% owner is well past his required beginning date, we value the 401(k) plan as of 12/31/07 (assume calendar year) and then sell assets that are now worth 50% of what they were then (therefore selling twice as much as we would have had to had he had the forsight to take the distribution at the beginning of the year) and make the taxable distribution by 12/31/08 for him. But, he doesn't have to take a distribuion in 2009 (which would have been calculated on a very small balance as of 12/31/08)? This doesn't seem as helpful as I'd hoped.

If a more than 5% owner's RBD is 4/1/09, does this mean he doesn't have to take the first RMD (for the 2008 year but postponed to 4/1/09) or the second RMD (which would be for the 2009 year)???

[austin3515]

It's not so much relief as complete and total elimination.

Just signed into law yesterday - no RMD's for 2009.

Somebody get me a tissue

A 4/1/09 RBD is a 2008 RMD, and there is no elimination of 2008 RMD's. Same logic applies in reverse to 4/1/2010 RMD's, only in reverse.

[Kevin C]

Are you referring to HR 7327? If so, it doesn't look like it eliminates all RMD's for 2009.

From Section 201 of the bill:

(b) Eligible Rollover Distributions- Section 402©(4) of the Internal Revenue Code of 1986 (defining eligible rollover distribution) is amended by adding at the end the following new flush sentence:

`If all or any portion of a distribution during 2009 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2009, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or 3405© or subsection (f) of this section.'.

I'm reading that as saying that if someone otherwise subject to an RMD for 2009 takes a distribution in 2009 and tries to roll it over, they can not roll over the amount that would otherwise have been an RMD. That would effectively make the RMD still apply if the person received a distribution during 2009.

[Kathy]

I guess I was hoping for something for the 2008 distributions - the ones calculated on balances that were much higher than they are now. Something like, if you haven't taken your distribution for '08 yet you can only take 1/2 and, if you already took it this year, you may reinvest up to 50% of the RMD back into your plan or IRA by 4/15/09 and not pay taxes on that 1/2 or something to help people who are having to sell investments now when the market is down so low. I don't see this as all that helpful.

[Bird]

Kathy, maybe you can explain since I've never understood this line of thinking. What's the problem to this solution? If someone hasn't taken a distribution by now, I think it's a fair assumption that they don't need the money. So they take the distribution, and if they want to, can invest it outside the plan.

Somebody get me a tissue

Amen

[401_4_ever]

Has anyone seen this actually signed into law? I saw it pass the house & senate but have not seen it make it's way into law yet.

[david rigby]

Yes. Th Senate passed it Thursday (12/11/08). Original bill is HR7327.

You can look it up at Thomas

As far as I can tell, it has not yet been signed by the President. Unlikely to be vetoed.

[Kathy]

In response to Bird, many of my clients who own their own businesses and are working past age 70 1/2, do need the money. Many of them have spent their lives working for a living and raising their families and are not necessarily wealthy. They just work for themselves rather than someone else and many of them are continuing to work because 1. they're quite able and capable, 2. they still need to earn a living because they haven't saved as they should have and 3. they enjoy their work.

They can take the distribution and pay taxes on it and then reinvest so they're not losing out on the potential gains when the market comes back but it still concerns me that the distribution is calculated using an overinflated value of 12/31/2007 and then they have to sell twice as much as they would have had to had the distribution been done in January '08. This reduces their tax deferred account which, in their minds, means they may have to work even longer to build it back up.

As Americans live longer I believe we may need to reconsider the 70 1/2 rule. My own parents are in their 70s and very active people. Both of my grandmothers passed away in their 90s and my Great Aunt Billie celebrated her 102nd birthday this past year. She is still able to live on her own with only a little assistance from her kids. That's over 30 year's over the 70 1/2 mark! I hate to see my own Dad have to take IRA distributions that are going to deplete their tax deferred accounts sooner than they run out of need for them (and I'm hoping that's at least another 30 years!)

[401_4_ever]

Thanks David, that's where I am too. Someone above noted it was signed into law, which I didn't think so yet. Agreed, it won't be vetoed (or pocket vetoed), just waiting for it to actually be signed before I do all my announcements.

[jevd]

What's all this stuff about liquidating assets. Can't an individual take a distribution "In Kind" so they don't have to take an actual loss? I know sometimes that isn't allowed due to proprietary funds and for other reasons but I think for the most part liquidations are not required. Please enlighten me if I'm wrong about this.

JEVD

[Kevin C]

The technical explanation of the bill is in "Benefits in the News" today.

http://www.jct.gov/x-85-08.pdf

Here is the part about the eligible rollover status of amounts that would have been RMD's for 2009.

If all or a portion of a distribution during 2009 is an eligible rollover distribution because it is no longer a required minimum distribution under this provision, the distribution shall not be treated as an eligible rollover distribution for purposes of the direct rollover requirement and notice and written explanation of the direct rollover requirement, as well as the mandatory 20-percent income tax withholding for eligible rollover distributions, to the extent the distribution would have been a required minimum distribution for 2009 absent this provision. Thus, for example, if an employer-provided qualified retirement plan distributes an amount to an individual during 2009 that is an eligible rollover distribution but would have been a required minimum distribution for 2009, the plan is permitted but not required to offer the employee a direct rollover of that amount and provide the employee with a written explanation of the requirement. If the employee receives the distribution, the distribution is not subject to mandatory 20-percent income tax withholding, and the employee can roll over the distribution by contributing it to an eligible retirement plan within 60 days of the distribution.

Apparently, even though the amount that would have been the 2009 RMD is not an eligible rollover distribution, it CAN be rolled over.

[Bird]

Kathy, I don't want to drag this out but I disagree. The bottom line is that retirement plan savings gets a special tax break, and the RMD rules are there to assure that deferred income is recognized and taxes are paid in a "timely" manner. There's nothing in the RMD rules that says the RMD has to be spent. If anyone is worried about long-term retirement security they can simply invest the money outside the plan. And I remain puzzled about how they "need" the money but have put off taking it until the last minute.