It’s bad enough that many retirees’ portfolios sustained significant losses during 2008. But income tax regulations on required minimum distributions, or RMDs, can make a bad scenario even worse because they force investors over age 70.5, and those who inherited IRAs or other retirement-plan accounts, to sell during a down market.
Fortunately, Congress recognized the problem, and in December then President George W. Bush signed legislation suspending the RMD rule for 2009.
“The required minimum distribution is suspended for the 2009 calendar year,” says Valerie Adelman, CFP, Financial Asset Management Corp., of New York. “This applies to all qualified plans such as 401(k)s, IRAs, and 403(b) plans.”
The RMD rules are fairly straightforward. The regulations require taxpayers to start withdrawing funds from their retirement plans by April 1 of the year after they turn age 70.5. The RMD is determined by life expectancy based on the values in IRS Publication 590 (www.irs.gov/pub/irs-pdf/p590.pdf).
Gil Armour, a financial advisor with Sage Point Financial Inc., in San Diego, gives an example. “If you have a couple, both age 70, the IRS life tables say that 27.4 years is the joint life expectancy. You divide the retirement plans’ account value by 27.4 and that would be the dollar amount you’d have to take out of the IRA during that particular year. It amounts to about a 4 percent withdrawal.”
There are several drawbacks to the new rule.
First, it doesn’t affect RMDs for 2008 — those are still required.