A Hill staffer wrote in his morning to let me know that the House passed legislation that will suspend the required minimum distribution (RMD) from retirement accounts in 2009. The Worker, Retiree and Employer Recovery Act (H.R. 7327) suspends the IRS requirement that individuals withdraw a minimum amount of money from their retirement accounts every year once they reach the age of 70-1/2.
This waiver applies to all defined-contribution plans, including 401(k), 403(b), 457(b), and IRA accounts, and is good news for seniors whose investments have been pummeled by the recent stock market turmoil. Instead of being forced to sell investments to take their RMD, they’ll be able to sit tight and wait for a recovery. Unfortunately, it’s too late to help for 2008, so retirees will still have to take their RMD this year or face a stiff penalty from the IRS.
Update1: The Senate has also approved this measure.
What follows is a listing of the key provisions of this legislation as it relates to retirement plans:
TITLE II – PENSION PROVISIONS RELATING TO THE ECONOMIC CRISIS
Taxpayer Relief
One-year suspension of the required minimum distribution (RMD): The bill would place a one-year moratorium on the RMD for 2009. This suspension is available to everyone regardless of their total retirement account balances.
Relief for single-employer plans
Allow pension plans to “smooth†out their unexpected asset losses: The bill permits employers to “smooth†the value of pension plan assets over 24 months instead of having to apply the mathematical average that Treasury requires. This change will soften the accounting of 2008 plan losses.
Adjust the transition to the new funding rules: PPA phases in full pension funding targets from 90% to 100% over 5 years (2008 – 92%, 2009 – 94%, 2010 – 96%, 2011 – 98%, 2012 – 100%). If a plan misses its target in a phase-in year, then the target automatically increases to 100%. The bill adjusts the “phase-in†rule to allow plans which miss their phase-in funding target to retain the same target and not jump to the 100% target. For example, plans that are less than 92% funded in 2008, their shortfall would be estimated relative to 92%, not 100%. With a sizable number of plans below 92% funded next year, the adjustment of this phase-in rule could provide significant relief.
Worker protections
Temporary change of the limitation on benefit accruals. For purposes of staving off restrictions on benefit accruals as a result of being < 60% funded, plans would be able to look back to the previous plan year to determine their funded status as it would apply to workers’ ability to accrue benefits.
Relief for multi-employer plans
Plans may elect to “freeze†their plans’ status for one year: For plans starting between October 1, 2008 and October 1, 2009, multi-employer plans may elect to freeze their current funding status based on the previous year’s level. This would freeze the terms of the funding improvement or rehabilitation plan adopted at any time during the previous plan year.
Plans may elect to extend correction periods: Plans generally must bring their funded position up to statutory standards within a correction period (10 years or 15 years). This structure aims at enabling stakeholders in troubled plans to phase in the higher contributions or deeper benefit cuts over a period of time. Plans may elect a 3-year extension of the current funding improvement or rehabilitation period, from 10 to 13 years and from 15 to 18 years. Election of this extended correction period would help offset 2008 equity losses.
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For 2010, can I take out IRA money for RMD
I have both 403b and IRA accounts with 403b paying much more than the IRA account. I would like therefore to take out money from the IRA account. Is this permissible?
Terry, I am well aware of that. My points(s) relate to both taxable (non-IRA) portfolios that got steamrolled at the same time IRA holdings did. The government needs money (from RMD)? You should realize that many IRA owners got screwed badly by the crash that was brought on by the massive fraud perpetrated by AIG, GS, et. al. and aided and abetted by the Federal Reserve Board and the Clinton/Bush administrations. So to clear things, I (like many) have both non-IRA and IRA portfolios. If govt. needs money, it seems obscene to try to take it by letting inflation eat into savings of non-wealthy retirees while aiding and abetting banksters by keeping their cost of capital close to zero. Adjust the $3,000 deduction for inflation — don’t penalize savers for government’s reckless policies. As for IRAs, they got pretty well trashed by bank and insurance fraud, and as Bernanke said at Brookings, liquidating was rational for individual savers — so suspending the RMD for 2010. Why is this so hard to understand? Class warfare is an ugly thing, but it is happening.
Frank
I think you need to realize that you never paid taxes on the funds in your retirement account. Therefore for tax purposes, you don’t have a “loss.” I agree that $3,000 is not what it used to be and should probably be indexed for inflation, but the government needs money so badly now that they aren’t likely to do anything that will reduce their intake for 2010.
Congress seems to be deaf on retirees but sucking up to the banking industry. Are we supposed to live on what money market funds pay (thanks to the Helicopter Ben Fed). Back into speculative equities at my age — are you kidding? And my IRA? It’s my “rainy day” fund. Suspend the RMD for 2010 OR let us deduct more of our capital losses on our savings — in the name of fairness if for no other reason. Don’t further shred the social contract.
RE: 31.2, I have seen the paper Peter Ortzog wrote for Ways and means — talk about a travesty — this man now heads OMB, and has committed us to big spending. How can he pretend that $3,000 is what it was in 1978?
RE: 31.3, I already could do this against other income. The RMD is a different issue. Those of us with IRAs that took BIG hits due to the rot created by the bankers and their buddies in govt. should get some tax relief on this. No wonder the social contract is no longer taken seriously.
1. Unlikely
2. It would be nice, but doubtful
3. You can up to $3,000
Two questions (really 3):
1. Any chance the RMD for 2010 will be suspended?
2. I have capital losses that, under current rules, may outlive my ability to offset them against ordinary income. To the writer who talks to Ways and Means staff, will they EVER increase this archaic $3,000 limit on writeoffs from capital loss carryforward? How about letting us use them to offset RMD from IRAs?
There are no withdrawal requirements for 2009 if you have been withdrawing up through 2008. Therefore, this should not factor into your Quarterly estimate.
Of course, I withdrew IRA funds in 2008 according to the existing regulations. My question pertains to what I must or should anticipate will be the corresponding withdrawal requiremnents in 2009 so that I may properly forecast quarterly tax payments. It matters a lot if I am to use the age-factor-divisor to compute the RMD during 2009 or the one corresponding to my age in 2008 instead? Perhaps the 2008 law does not address this 2009 question at all…
Guess what? To all of you that are less than 70 1/2, you will have a different attitude about this when you get here! To be “forced” to take the RMD at a time when the market has plunged over 30% is tough to take. You can walk the talk when you are wearing my shoes.
70 and 5/6ths and proud of it!
I just received an email from Senator Feinstein; the bill was signed on 23 December 2008.
Has this law been signed by the President? I would like to make my withdrawal plans for 2009.
What I don’t understand is why anyone who is retired would hold a significant position in equities – it is way too risky as we saw in 2008. My 83 year old Dad died in May and had over 70% in equities. I sold everything the day he died and have everything in money market and CD’s for my Mom. Suspending the RMD just encourages risky speculation in the equity markets for those who cannot tolerate the risk.
Three questions:
1. Is the suspension for ’09 RMDs available to taxpayers who became seventy and a half in ’08 and opted to forego the RMD for ’08, expecting to have to take an extra RMD in ’09?
2. Will their 2010 now include the extra RMD?
3. If so, will these taxpayers pay more tax in 2010 (perhaps they will be in higher tax bracket, or tax rates are likely to increase) than if they distribute in ’09 and 2010?
Note that one does not have to transfer cash; it can be stock. I am moving shares from an IRA account to a taxable account held at the same institution. The dollar amount I must transfer doesn’t change, but at least I can hang on to the asset. My CPA concurs that this is allowed.
Peter:
I got the info from Collin W Fritz and Associates, Ltd – The Pension Specialists.
Not sure where you read that they would be increasing the RMD age. I might find some new reading material if you believe that one. The government needs the RMD’s to help pay their bills. The deficit is likely to break a trillion this year and next. The days of 2% of the population picking up 50% of the tax tab are over. Take away capital gains from tax revenue and cut short term income of the the well off and you create a mammoth hole. Frankly, I’m surprised that they passed this for 2009 it makes no sense economically.
I think too many people are looking at this the wrong way. The government allows you to earn money and postpone paying the taxes you owe. Not sure why everyone thinks they should be entitled to postpone it more. Yes, the market went down but it will likely still be relatively low at the end of this month. For some people it might be an ideal time to take the money and put in a taxable account when the market is still relatively low. Some of you may pay lower taxes over the long run that way.
I read somewhere that they were going to change the RMD age to 75. Is this true and if so, how does that affect those people that are between 70 and 75? Would they still be required to take their RMD anyway?
The provision of the bill regarding the minimum required distribution for 2009 is a welcome news but for MRD in respect of 2008, it comes too late. Hopefully, Treasury will be able to issue some instructions to IRS to provide some sort of relief to those who have already taken the MRD for 2008. Frankly, the Administration, Congresss and Federal Reserve have handled response to the entire financial crisis (not only reflief for the RMD) very sloppily. A lot of turbulence could have been avoided (or at least mitigated) by concerted action earlier on in the year.
Final word from Treasury for 2008 with RMD
“We can’t do anything for 08”.We don’t have ability. Just received call back from legislative section 3PM December 16,2008
1. We are seniors with huge losses but we must sell, thus depleting assets which may recover later. How is this beneficial for a senior? I’m beginning to think our grandparents’ mattress wasn’t such a bad idea.
2. Since when is it greedy to take your MDR later in the year? Some of you are not very nice people.
What a lame excuse to be fair to those already having taken their RMDs! Since when is Congress concerned about fair other than bailing out the lobbyists & the companies that they represent that give big bucks. Some taxpayers actually do wait until the end of the year. Now their RMD is calculated on a balance that was at least 30% or higher at 2007. Many will probably have to sell postions, like mutual fund managers, in good investments merely because cash is required to be paid out. Once again, the average American will bear the burden of irresponsibility & lack of vision by those who have positions of trust in our society.
@Howard
The Senate concurred with HR 7327 on Friday (see http://finance.senate.gov/press/Bpress/2008press/prb121108b.pdf ). This went through so automatically that there is little doubt in my mind that the President will sign it. The House in writing HR 7327 apparently did not want to discriminate against people who had already taken all or part of their RMD for 2008, and it appears made a specific decision to only waive 2009. I don’t think that the IRS can waive 2008 on their own, and I don’t know how they could make people whole if they had already taken it, unless they let them put it back in.
HI
I talked with legislative staff for the House Ways and Means Committee this AM. I was told that they were waiting to hear from Treasury Dept. which had notified them that the IRS was possibly going to waive 2008 RMD. I was told that the IRS was suggesting that it would make persons who had already taken the distribution whole again.
I will be calling again tomorrow since I was told they were waiting to hear from Treasury before they called anyone back to confirm.
The other part of the issue is, if the IRS does not do anything, then HR 7327 won’t mean much unless the Senate ?concurs and the President signs it.
Could you check as well…December 31 is getting very close and some of us have also had checks drawn from taxes by IRA Trustee to pay charitable contributions.
Howard Garber
@Tim
It’s clear from title that the suspension is for 2009, not 2008. Granted that a suspension for 2008 would be more useful to those of us who had more to distribute in 2008, Congress felt that it would disadvantage people who take monthly distributions as opposed to lump distributions. This being the case I am making a lot of 2009 Charitable distributions with in 2008 with my 2008 RMD, so I don’t have to touch my IRA in 2009. When Congress sends lemons, you need to know how to make lemonade.
@Terry: sorry, RMD suspension isn’t even for 2008, it is for 2009, so as I said before, it was a useless gesture on Congress’ part.
The RMD provision does not seem to make any sense from an economic standpoint. The only people that benefit are those that can afford not to take the RMD. So they pay less taxes and potentially less money gets funnelled back into the economy. This is a feel good measure that makes me wonder if congress has a clue.
As an amendment to my previous comment, HR 7327 was passed by a voice vote in the Senate yesterday, so it can be assumed that it will become law.
A previous comment has it correct, we cannot constantly change the rules just because the market dropped in value. Those individuals who took their redemptions at the beginning of the year and or
on a monthly basis either did well or not so bad.
Lesson learned, don’t be greedy and think the market is a one way high and higher, there will be bumps in the road. Therefore, if you spread your RMD over the full year and or reinvest it in the market, it should even out.
@Tim Since the input to your IRA, etc wasn’t taxed in the first place, the loss in value this year is not a loss for tax purposes. As mentioned above, my IRA is down almost 50% this year from 12/31/07 (luckily, I took part of my RMD earler this year), but taking the rest at this time will deplete my IRA unnecessarily. Suspending it this year, or changing the value on which it is figured to a more current one would have been more helpful IMHO. Of course this apparently hasn’t been passed by the Senate or signed into law, so even this may not happen.
I HAVE BEEN HOLDING OFF RMD SO SOME BENEFIT MIGHT OCCUR.
AT 79 I AM REQUIRED TO TAKE 5% — BUT BECAUSE MY VALUE IS DOWN 50% IT COMES TO 10% OF MY CURRENT IRA.
A LOWER TAX RATE FOR THE WITHDRAWAL AMOUNT WOULD HAVE BEEN HELPFUL OR NO WITHDRAWAL PERMITTED.
THEY SAY IRS CAN STILL CHANGE DATE VALUE IS CALCULATED–I’M HOPING FOR THAT AT THIS POINT.
The RMD for 2008 is based on the value of the your IRA as of 12/31/2007, where generally values where higher. The 2009 RMD will be based on the value as of 12/31/2008, and it appears that the values will be much lower.(10%-20%-30%-40%-50%) This part of the bill is once again short sighted in its suggested benefit to the retirees/tax payers.
@MB, it is useless and shifts liability to taxpayer. useless because we should be forcing companies to meet a 2% target difference. useless, because now instead of balancing their books for the year, we are letting them balance books over a few years. it’s capitalization on the books, not in real terms. i really hate fuzzy and creative accounting math. if companies can’t balance their books on a bad year, then they ought not be in business. sorry for the employees, but that is life. the accrual provision is useless for a few reasons because ultimately in the end it doesn’t matter. sorry, just don’t get the silly math going on here.
@nickel: although i concede that there are some that do not need to withdraw at 70.5, most do. Those who don’t need to have enough money already, so guess what, tough love because that is the risk you have in investing in retirement accts in the market. we can’t keep adjusting the goal posts because of inconvenient market timing. the plan surely doesn’t help most of the people who need to tap the funds. besides, if you have income outside the retirement acct, use the loss to offset your income.
Actually, my parents are only withdrawing because they have to. They’re living just fine on my dad’s pension, so they wouldn’t be pulling out money (especially not this year) unless they were forced to do so. And MB is correct… This bill covers much more than the RMD.
This bill actually has a much larger impact than just RMDs. In fact, I would say that RMDs are a minor portion of the bill.
This bill will allow plan sponsors (companies) some much needed relief from the funding requirements set forth in the PPA. In particular, this bill allows plan sponsors to smooth their assets over 2 years instead of merely recognizing the current market value of their assets, which of course are in the tank. In short, the PPA requires plan sponsors to eventually get to a point where the assets in the pension trust are equivalent to the future liabilities of the plan. Therefore, if assets decrease substantially, as they have this year, then the company is responsible for making a (large) cash contribution to account for the gap in assets and liabilities. Smoothing (or averaging) the assets decreases this cash contribution, providing much needed capital for companies. Hopefully this will save some jobs.
The change in the funding target percentage has similar impacts.
I think the redeeming fact of this bill is that it provides relief for companies, yet it does not jeopardize the original goal of the Pension Protection Act (PPA) – to ensure the future solvency of pension plans.
To adress Tim’s point that this is a “useless bill” – under the current rule if you work for a company that has a funding target (i.e., plan assets divided by plan liabilities) under 60% your pension benefit would be FROZEN (i.e., you get nothing, zilch, nada) until the company restored the plan to a given funding level. Hence, you have already taken a pounding in your 401(k) and now your pension accruals would cease. The new bill would allow companies (in some cases) to continue your pension accruals.
what a useless bill. if you are 70.5 all but maybe .005% are already withdrawing anyways. can’t these guys do something more important like pass legislation on immigration, health care, etc.?