Tell your clients with defined contribution plans and IRAs to keep their money in there. There will be no required minimum distributions (RMDs) for 2009. That will reduce the tax bite for millions of retirees and their beneficiaries, if only temporarily. This tax relief sounds easy, but it comes with the usual complications your clients need to be aware of.

The New Rule

The Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) became law on Dec. 23, 2008, and among its many provisions is the suspension of RMDs for 2009. Many retirees were hoping that RMDs would be suspended for 2008 since the decline in the stock market had reduced the value of their IRA and 401(k) accounts, but no such relief was enacted. The rules for calculating RMDs state that the RMD for the year is based on the prior year-end market value. For 2008, that meant using the much higher balance from Dec. 31, 2007, resulting in an RMD that was a much larger part of the total account balance than normal.

Congress avoided any similar problems in 2008 by looking forward and suspending RMDs for 2009. The suspension of RMDs is for one year only. In 2010, RMD requirements will resume, barring any further changes.

There's no relief for 2008, even if the 2008 RMD is taken in 2009. This would happen if a client turned 701/2 in 2008. In that case, the required beginning date (RBD) for RMDs would be April 1, 2009. Though the 2008 RMD can be taken in 2009, it's not suspended and must be taken since it's still the RMD for 2008. Clients must still use the Dec. 31, 2007, balance to compute their 2008 RMD, even if taken in 2009.

The suspension of 2009 RMDs applies only to defined contribution plans like IRAs, 401(k)s, 403(b)s and 457 plans, not to defined benefit plans or traditional pension plans. Clients with defined benefit plans will have to continue to pay RMDs. In addition, clients whose retirement plans are invested in an annuity that has been annuitized will most likely not be able to take advantage of the RMD suspension.

The suspension of RMDs applies to both account owners and account beneficiaries, including Roth IRA beneficiaries. There also do not need to be losses in the retirement account in order to skip the 2009 RMD.

What if your client wants to take an RMD? The law says that distributions that would have been RMDs for 2009 (but now are not) will not be treated as RMDs. However, retirement plans don't have to offer a direct rollover option, and these would-be RMDs won't be subject to the 20% withholding.

In addition, plan participants can roll over these distributions. Normally clients cannot roll over a required RMD. So what would have been an RMD can be converted to a Roth IRA, if the plan participant or IRA owner qualifies under the $100,000 income eligibility limit. As with any rollover, the plan participant has 60 days to roll over the funds.

Since the law was enacted so late in the year, some clients may have already received automatic 2009 RMDs (or monthly partial payments) from their financial institutions. In that case, if the funds aren't needed, they can be redeposited to an IRA within 60 days from the day they received the distribution. But non-spouse beneficiaries can't do this rollover and are stuck with the distribution, even though it is not required.

RBD Issues

The new law does not change an individual's RBD. The RBD is April 1 of the year after turning 701/2 or, in some employer plans, April 1 of the year after retirement. This will not change. If an individual turned 701/2 in 2008, the RBD will still be April 1, 2009. For an individual who turns 701/2 in 2009, the RBD will still be April 1, 2010, even though no RMD for 2009 is required.

For example, assume Bill turns 701/2 in 2009, making his RBD April 1, 2010. He does not take an RMD for 2009 because the 2009 RMD rules are suspended. Bill might think that he has until April 1, 2011, to take his first RMD, because to him 2010 is his first distribution year, but that is not the case. He must take his RMD for 2010 by the end of 2010. Even though 2010 is the first year Bill is required to withdraw, 2010 is still Bill's second RMD.

Let's assume Mary turns 701/2 in 2009, so her RBD is April 1, 2010. She does not take an RMD for 2009 due to the suspension of the RMD rules. Mary dies in May 2010. She has died after her RBD, even though she did not take a distribution. Her first distribution is not required until 2010, but once again, the new law does not change the RBD.