Required Minimum Distributions not required for IRA’s in 2009

January 2nd, 2009 | Posted in IRA-Distributions

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RMD Alert: Temporary Relief for 2009

Required Minimum Distributions (RMD) Background and Summary

On December 23, 2008, President Bush sgned into law the Worker, Retiree, and Employer Recovery Act. The Act states that no RMD is required for 2009. As you are aware, the current global economic conditions have caused sharp declines in many contract values. This Act is designed to provide relief to contract owners who would otherwise be forced to take a distribution in 2009. The goal is to not force contract owners to take a distribution when their contract value is at a low point and instead allow those funds to stay invested in the contract and participate in any economic recovery.

The RMD Rules, Briefly Stated:

Individuals are required to take at least a minimum annual distribution from their account after they reach their required beginning date, which is the April 1 after they reach age 70 1/2.
For beneficiaries of deceased individuals not already receiving RMDs, the required beginning date is either following the 5th anniversary of death (for a complete distribution) or following the 1st anniversary of death (for a periodic distribution). Special rules apply if the only designated beneficiary is the surviving spouse.

The Situation That Congress Sought to Relieve:

In the current economic environment, many contract values have been diminished by the deep declines in the stock market.

Congress was concerned that requiring individuals to take 2009 RMDs could have the unintended effect of forcing individuals to “sell low.” As a result, the RMD would diminish the likelihood of the individual being able to participate in any economic recovery.

What This Act Changes:

No RMD is required for 2009.
Any individual who attains age 70 ½ in 2009 will not be required to take a first RMD by April 1, 2010, but the distribution for the 2010 calendar year must be taken by December 31, 2010.

If the individual takes a partial withdrawal, the distribution is not subject to the mandatory 20% withholding that is typically required of RMDs.

For beneficiaries under the 5-year rule, the 5-year deferral period is extended by one year (e.g., if an individual died in 2007, the period would end in 2013 instead of 2012).

Frequently Asked Questions

Q1. If I don’t take a 2009 RMD, won’t I be required to pay a tax penalty? No. Under the Act, there is no RMD required for 2009, and no tax penalty will be assessed if you do not take your RMD. In a normal year, the Tax Code assesses a 50% excise tax on any required distribution that fails to be distributed. But 2009 will not be a normal year. No excise taxes will apply because there will be no required distributions in 2009.

Q2. I’ve been taking RMDs for years and I’ve grown to depend on them as a source of retirement income. Can I still take the distribution that I had planned on? Absolutely. Your access to your contract hasn’t changed. The only thing that’s changed is that you aren’t required to take a 2009 minimum distribution. If you would like to take a distribution anyway, you can certainly do that.

Q3. I currently have a systematic withdrawal set up on my contract. Will I still receive my
payments? A systematic withdrawal is an automatic withdrawal that you take monthly, quarterly or annually. If there is currently a systematic RMD withdrawal set up on your contract, and you wish to keep it, there is nothing you need to do. The payment you receive will be based on the RMD calculation. However, you may elect to receive a systematic withdrawal in any amount that you request.

Q3a. If I stop my payments, what will happen in 2010? Starting in 2010, your systematic payments will resume in accordance with your original instructions.

Q3b. How do I stop my payments? If you wish to stop receiving the payments, please contact us.

Q3c. Can I return a systematic payment that I received? You can roll over any payments received back into the contract. The transaction will be processed on the day that all paperwork is received in good order prior to the close of the New York Stock Exchange.

Q4. What period does the relief apply to? The relief applies to RMDs due to be paid out to satisfy the 2009 RMD requirement. Any individual who attained age 70 ½ in 2008 and opted to defer his or her 2008 payment up to April 1, 2009, would still need to take a 2008 payment between now and April 1, 2009.

Q5. Which plans does this relief apply to? The waiver applies to the following plans: IRA, 401(a), 401(k), 403(a), 403(b) and governmental 457(b) plans.

Q6. What is the relief being provided with regard to RMD payments for the 2009 calendar year?
Relief is being provided in the following ways:

a) No RMD is required for 2009.

b) Any individual who attains age 70 ½ in 2009 will not be required to take a first RMD by April 1, 2010, but the distribution for the 2010 calendar year must be taken by December 31, 2010.

c) If the individual takes a partial withdrawal, the distribution is not subject to the mandatory 20% withholding that is typically required of RMDs.

d) For beneficiaries under the 5-year rule, the 5-year deferral period is extended by one year (e.g., if an individual died in 2007, the period would end in 2013 instead of 2012).

Q7. What about the RMD I just took for 2008? Am I going to receive any relief for that?
This relief applies only to 2009.

This information is provided as general guidance. It is not intended to be legal or tax advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. The information source for this advisory is from ING-USA.

Please visit our site for more Retirement, 401k, and Insurance information:
www.erollover.com

Distribution Options for IRA Beneficiaries

November 15th, 2008 | Posted in IRA-Distributions

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Distribution Options for IRA Beneficiaries

Why must I take distributions from my inherited IRA?
IRAs are intended to provide for the retirement of the IRA holder and, after he or she is deceased, for the support of his or her beneficiaries. They are not intended to permanently shelter savings from income tax. For this reason, the IRS has established distribution rules to ensure that an IRA will be depleted over the course of the IRA holder’s and, if applicable, beneficiary’s life expectancies. The distributions that are taken to satisfy these rules are often referred to as required minimum distributions (RMDs).

What happens if I miss a required minimum distribution (RMD) from an inherited IRA?
Generally speaking, if an IRA beneficiary fails to take an RMD by the applicable deadline (generally December 31), the beneficiary is subject to a 50% penalty on the amount that should have been taken out, but was not. However, if a spouse beneficiary is the sole beneficiary of an inherited IRA and he or she misses an RMD, there is an added consequence. In such cases, the IRA ceases to be a beneficiary IRA and is deemed to be the surviving spouse’s own IRA.

Following the death of an IRA holder, what factors are taken into consideration for determining the distribution alternatives available for the beneficiaries of the decedent’s IRA?

While many factors can impact what distributions options are available to an IRA beneficiary following the death of an IRA holder, there are three primary factors that must be taken into consideration:
1. the age the IRA holder was at the time of his or her death
2. the beneficiary’s relationship to the deceased IRA holder
3. whether the beneficiary in question was the sole beneficiary of the IRA

How does the IRA holder’s age at death affect my distribution options as an IRA beneficiary?
Whether the IRA holder died before his or her required beginning date (April 1 following the year in which the IRA holder turned age 70½) has a major impact on what beneficiary options are available to you.

What are my distribution options as an IRA beneficiary if the IRA holder died before his or her required beginning date?
When an IRA holder dies before his or her required beginning date, two basic distribution options are generally available to you as an IRA beneficiary:

Five-Year Rule: Under this option, an IRA beneficiary can generally take distributions in any amount at any time. However, the beneficiary must totally deplete his or her portion of the IRA by no later than December 31 of the year containing the fifth anniversary of the IRA holder’s death.
Life Expectancy Payments: Under this option, an IRA beneficiary must begin distributions based on his or her single life expectancy by no later than December 31 of the year following the year of the IRA holder’s death. Spouse beneficiaries, however, may wait until December 31 of the year the deceased IRA holder would have turned age 70½ to begin distributions under this rule.
(Note: The distribution options available to an IRA beneficiary following the death of an IRA holder can be significantly impacted by additional factors including the terms of the underlying IRA investments, the terms of the IRA plan agreement, and the administrative policies of the IRA trustee or custodian.)

What are my distribution options as an IRA beneficiary if the IRA holder died on or after his or her required beginning date?
When an IRA holder dies on or after his or her required beginning date, required distributions for beneficiaries, beginning in the year following the year of the IRA holder’s death, are generally determined according to the single life expectancy of the beneficiary. However, if the remaining life expectancy of the deceased holder is longer than the life expectancy of the beneficiary, the beneficiary may use the remaining life expectancy of the deceased IRA holder. For nonspouse beneficiaries (as well as spouse beneficiaries in cases where the spouse beneficiary is not the sole beneficiary) the life expectancy factor is determined according to a nonrecalculation method. On the other hand, in cases where a spouse beneficiary is the sole beneficiary, his or her life expectancy factor is determined according to a recalculation method.

When determining my required distributions as an IRA beneficiary, what does it mean to recalculate or not recalculate my life expectancy?
The federal regulations governing required IRA distributions provide two basic methods for determining life expectancy factors: recalculation and non-recalculation. With the recalculation method, an IRA holder (or spouse beneficiary) looks up a life expectancy factor for calculating required minimum distributions each year in the IRS-provided single life expectancy table found in IRS Publication 590, Individual Retirement Arrangements (IRAs). Alternatively, with the nonrecalculation method, the life expectancy factor is looked up in the life expectancy table for the first distribution year in the same way as when a person uses the recalculation method. However, in subsequent years, rather than going back to the table each year, one year is subtracted from the original life expectancy factor for each year that has passed since the first beneficiary distribution year. The life expectancy of nonspouse beneficiaries must always be determined according to the nonrecalculation method.

What beneficiary distribution options are available when a deceased IRA holder’s estate is named as the beneficiary of his or her IRA?
The distribution options available to an estate as an IRA beneficiary vary depending on whether or not the IRA holder died before his or her required beginning date. In cases where the IRA holder has died before his or her required beginning date, the IRA funds may be paid to the estate using the five-year rule (i.e., distribution may generally be made at any time in any amount provided the entire IRA is depleted by December 31 of the year containing the 5th anniversary of the IRA holder’s death). If the IRA holder died on or after his or her required beginning date, the estate may generally take distributions over the remaining (nonrecalculated) life expectancy of the deceased IRA holder.

What beneficiary distribution options are available following the death of an IRA holder when a trust is named as the beneficiary of an IRA?
If the trust meets certain criteria outlined in IRS regulations, the individual beneficiaries of the trust may be eligible for the same distributions options they would otherwise be eligible for if they had been named as direct beneficiaries of the IRA. However, in cases where the trust does not meet all of the criteria outlined in IRS regulations, the trust will either be required to take distributions in accordance with the five-year rule (if the IRA holder died before his or her required beginning date), or over the nonrecalculated life expectancy of the deceased IRA holder (if the IRA holder died on or after his or her required beginning date). In order for the individual beneficiaries of the trust to be eligible for the same distribution options they would be eligible for if they had been directly named as beneficiaries of the IRA, the trust must meet the four following criteria:
1. the trust must be valid under state law
2. the trust must be irrevocable, or become irrevocable upon the death of the IRA holder
3. the beneficiaries of the trust must be identifiable
4. a copy of the trust instrument or qualifying documentation of the trust must generally be provided to the trustee, custodian or issuer by no later than October of the year following the year of the IRA holder’s death
This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.

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