When President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 on December 23rd, he suspended the requirement to take minimum required distributions in 2009. That's good news for retirees that didn't have the financial need to take a full distribution.
In this article, we're going to focus on an important change that was made to the minimum required distribution, or MRD, rules in 2009. We'll start by explaining the concept of a minimum required distribution, and who is normally required to take this distribution from their retirement account. Then we'll finish up by talking about the 2009 exemption, as well as those retirees that must still take a distribution in 2009.
The purpose of a minimum required distribution is to make sure retirees use the money they've set aside for their retirement years, and not leave it behind as part of their estate. Of course, the Internal Revenue Service is also interested in seeing these distributions are taken each year, since the money will be subject to federal income taxes.
In general, all of the tax deferred Employer-Sponsored Retirement plans such as the 401(k), 403(b), Rollover IRAs, SEP IRAs, and Traditional IRAs are subject to minimum required distribution rules; Roth IRAs are exempt from this requirement. The exemption also applies to most Section 457(b) deferred compensation plans maintained by state-level political agencies.
Under most employer sponsored plans, participants must take their first minimum withdrawal from their account by April 1st of the year following the year they reach age 70 1/2. Individuals delaying taking their first MRD until April 1st must take their second MRD by December 31st of that same year.
In 2009, minimum required distributions (MRD), also referred to as required minimum distributions (RMD), were suspended as part of the Worker, Retiree, and Employer Recovery Act. This law eliminates minimum distributions for the calendar year 2009 from both individual retirement plans as well as employer-provided qualified retirement plans. The next required distributions will take place in 2010.
In addition, individuals turning 70 1/2 in 2009 do not have to take their first distribution by April 1, 2010. However, these individuals will have to take their first MRD on or before December 31, 2010.
Individuals that turned age 70 1/2 in 2008 are permitted to wait until April 1, 2009 to take their first MRD. Although these distributions are taken in the calendar year 2009, they are still considered 2008 distributions, which have not been suspended. This means that individuals that turned 70 1/2 in 2008, and who waited until 2009 to take their first MRD, are still required to take this distribution.
Failure to take the 2008 required minimum distribution by April 1, 2009, can result in a 50% excise tax penalty on the amount not withdrawn.
Individuals age 70 1/2 and over that are rolling over an Employer-Sponsored Retirement Plan into an IRA are not required to take a MRD from that account in 2009. Under normal circumstances, these individuals would be required to take an MRD before rolling over any funds to an IRA. Once again, because 2009 MRDs are suspended, such distributions are not required.
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