Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Certain Other Changes Under the Worker, Retiree, and Employer Recovery Act of 2008
On December 23, 2008, President George Bush signed the legislation titled above in italics. The Act provides pension funding relief for individual taxpayers and for single-employer and multiemployer plans. More importantly, it provides an opportunity for beaten-down qualified plans and IRAs to rebuild equity positions by eliminating the requirement to take required minimum distributions (RMD) in 2009.
One-Year Waiver of Required Minimum Distribution Rules
The Act temporarily waives the requirement to take the required minimum distributions (RMD) for 2009 only. The deadline for 2009 RMDs would have been December 31, 2009 for taxpayers already taking RMDs. The deadline is now extended to December 31, 2010 for those taxpayers.
For taxpayers turning 70 ½ in 2009, they will not be required to take their 2009 RMDs by April 1st, 2010, which would have been the normal deadline. They can now put off their 2009 RMDs until December 31, 2010. However, that’s the end of the waiver period. These taxpayers who turned 70 ½ in 2009 must take their 2010 RMD by December 31, 2010.
The legislation does not affect taxpayers who turned 70 ½ in 2008. These folks must still take their RMD by April 1, 2009 or elect to take it by December 31, 2008.
The legislation also affects 2009 rollovers from traditional IRAs and 401(k) plans to ROTH IRAs. Normally, the taxpayer would have to take his or her 2009 RMD prior to rolling the account into a ROTH IRA. The legislation waives this RMD as well.
For taxpayers who are receiving RMDs from an inherited IRA under the five-year rule also may skip the 2009 RMD, effectively extending the five-year period to six years.
An eligible rollover distribution made in 2009 that would have been a RMD but for the Act is not subject to the mandatory 20% withholding and may be rolled over within the 60 days of the distribution. Finally, an employer that makes such a distribution to an employee in 2009 is permitted but not required to offer a direct rollover.
Direct Rollovers from Retirement Plans to ROTH IRAs
Distributions from qualified plans, tax-sheltered annuities and 457 plans may be rolled directly into a ROTH IRA. The employer plan document must allow a direct rollover. The adjusted gross income limit of $100,000 still applies for 2009. This change is effective for distributions after 2007.
Penalty-Free Early Withdrawals by Individuals Called to Active Duty
While probably of no effect for my clients, it is worth noting that qualified reservists called to active duty would have had to pay the 10% penalty on early distributions made after December 31, 2007. The Act eliminates that end date so that all distributions are penalty-free, no matter when made.
Increase in Penalties for Late Filing Partnership and Sub S Corp Tax Returns
The Act increases the penalty for failure to timely file a partnership or an S corporation tax return from $50 per partner or shareholder to $89 per partner or shareholder.
Title I and Title II of the Act contains many technical changes to qualified pension and profit sharing plans, most of which I deemed to be of no interest to you.
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