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Distribution Change for 2009
The stunning fall of the stock market in 2008 has led the federal government to offer a one-year break in 2009 from required minimum distributions (RMDs) affecting IRAs and defined contribution retirement plans such as 401(k) plans, 403(b) plans, 457(b) plans and SEPS.
Under the law, people age 70½ or older must take an RMD each year from their retirement account once they stop working or face stiff penalties from the IRS; they must take an RMD from their !RA whether they have retired or not. The amount of the RMD is based life expectancy.
On Dec. 23, 2008, however, President Bush signed the Worker, Retiree and Employer Recovery Act of 2008, which suspends RMDs for 2009. Of course, investors can take a distribution if they choose. But the law is designed to help investors avoid having to sell stocks at greatly deflated prices in order to make their distribution. Required minimum distributions will resume in 2010 -- by which time the hope is that the market may be more favorable. And investors who take their 2008 distribution in early 2009 -- usually those who turned 70½ during 2008 -- still must take that 2008 distribution.
The respite also applies to distributions taken by beneficiaries of IRAs or retirement plans. When a plan participant or IRA owner dies before reaching 70½, beneficiaries generally can choose to take their money either over five years or based on the life expectancy of the beneficiary. Under either option, 2009 will not be counted. In other words, beneficiaries who withdraw annually based on life expectancy will not have to make a withdrawal in 2009. And those who choose the five-year option will have an additional year to make the withdrawals.
Of course, not everyone can afford not to take money from their retirement accounts in 2009. But for those who can get by without taking a distribution, or with taking a smaller distribution, this one-year respite gives their investments a chance to recover from the market disaster of 2008.
If you have additional questions about the RMD, contact your financial adviser or your tax professional.