Mandatory withdrawals eased for 2009
The rules surrounding mandatory withdrawals from retirement accounts have eased in 2009, but the change isn't without its fair share of confusion. Host Tess Vigeland asks tax adviser John Battaglia to break it down.
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TEXT OF INTERVIEW
Tess Vigeland:If you're 70-and-a-half years old or older, you may have had to grit your teeth as you took the mandatory withdrawl from your 401k or IRA last year.
But there is help for 2009 and here to explain is John Battaglia. He's a tax advisor with Deloitte. Welcome to the program.
John Battaglia: Thank you.
Vigeland: Remind us first of all: 70-and-a-half, you have to start taking money out of your retirement funds -- your 401(k)s, your IRAs. Why is that?
Battaglia: Well, the rule has been around for a while and it's just so that people will eventually have to pay tax on the money that they accumulated. And this applies to a traditional IRA, simplified employee pensions, 401(k)s, money purchase and profit sharing plans. It would not apply to a Roth IRA.
Vigeland: So now the rules have changed. Can you briefly tell us why that is?
Battaglia: Well, originally everybody thought that they were going to allow people to defer their 2008 minimum distribution, because of what happened with the economy and the stock market, that the values were very low. But the minimum distribution is calculated based on your balance as of the previous year, which for 2008, would be 12/31/07 when the values were a lot higher. So people will be taking out a lot more money proportioned to what's in their account. But that didn't happened. And it happens for 2009, meaning that if you have to take out a minimum distribution in 2009, you could defer it until 2010. Now one thing that's confusing is, after you turn 70-and-a-half in 2008 and the first year your turn 70-and-a-half, you can actually for that first year, defer minimum distribution to April 1, 2009. But, if you deferred your 2008 distribution to April 1, 2009, you still have to take it out because that's your 2008 distribution.
Vigeland: Let me just complicate this a little more. What if you actually turn 70-and-a-half this year?
Battaglia: Right. If you turn 70-and-a-half right now, let's say you turn 70-and-a-half in 2009, your first distribution will be taken out in 2010 and would have to be taken out by 12/31/2010.
Vigeland: So what's the main question to ask as you're deciding whether to withdraw or not?
Battaglia: I guess you have to ask "Do I need the money? Do I need to take out the minimum distribution?" And really what they need to look at is, let's say, how much money do they have outside of their retirement plans? Could they use that money for 2009 and defer the distribution? Because it is a benefit in terms of if the market rebounds to allow the money to be there to grow rather than take it out and pay tax on it.
Vigeland: OK, and again, this is really a question for anyone who doesn't feel like they have to take these distributions.
Battaglia: Right. You really, you really need to look at it. You know, another thing that people need to be aware of is a lot of people use their minimum distributions and have money withheld from them even more than they need to be withheld for that specific distribution in order to cover their taxes on all their income. They got to be aware if you're going to defer that 2009 distribution, you have to then pay taxes in another way. So, you know, keep that in mind.
Vigeland: Good advice. Alright. John Battaglia is a tax advisor for Deloitte. Thanks so much for talking us through this.
Battaglia: You're very welcome. Thank you for having me.
Comments
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From Charlotte, NC, 01/10/2009
I think this article was a bit confusing to the person not "in the business". I've been phoning clients all week to advise them of this 2009 change. The bottom line, if you would normally be required to take a required minimum distribution (RMD) from your IRA for the 2009 tax year, you are now not required to do so. However, if you are counting on your RMD for your ongoing expenses or an annual bill you must pay, then you may still take your RMD if you wish (or even a lesser amount, if that's all you need). What is vital to know is that it appears many mutual fund companies and brokers are still planning to send out these distributions (which are taxable!) to their customers who have previously put standing instructions on file with them. So for example, if you have the mutual fund company automatically compute your RMD for you each year and mail you a check on the date(s) of your choice, then it is likely they will do that this year also regardless of the law change. If, however, you would prefer to not receive that taxable distribution, then you need to contact your mutual fund company or your broker and tell them NOT to send you your RMD this year. Otherwise you may have a taxable distribution surprise you in your mailbox in 2009. The fund companies and brokers realize many clients require these distributions for ongoing expenses and so they are loathe to not send the distributions out like always if they have instructions on file from their customers specifically asking them to do so.
From Wexford, PA, 01/10/2009
This looks like the raw transcript of the the interview. There are several - and critical! - places where the language is unclear; so much so that after reading through it once I tire of untangling it in my mind. As such, the interview is totally unhelpful - other than to raise a complex subject which requires organization, clarity and precision to explain -- all lacking here. It should never have been aired - much less put out in print.
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