Retired? Over 70½? It may be time to see your tax advisor about September 2009 changes to the Required Minimum Distribution rules. The Internal Revenue Service in Notice 2009-82 just announced guidance relating to the waiver of 2009 Required Minimum Distribution (“RMD”) rules which also apply to Virgin Islanders.
Employees and self-employed individuals may put aside (or have put aside for them) income that they do not have to pay income taxes on currently. These retirement plans have various names: IRAs, 401(k) plans, teachers’ retirement annuities, etc. Since the individual does not have to pay income tax on these monies until they are distributed out of the plan, the smart thing would be to leave the money in the plan forever and never pay income tax on it. To avoid individuals not paying income tax on their retirement funds, Congress requires that starting in the year the individual reaches age 70½ the individual must each year withdraw a distribution of a portion of the money in the plan and pay income tax on it or pay a 50% penalty on the amount that should have been withdrawn and wasn’t. The only exception is that in the year the taxpayer reaches 70½ the taxpayer may elect to take the first year distribution between January 1st and April 1st of the following year. The taxpayer who delays the first year’s distribution pays tax on the first and second years’ distributions in the second year.
Congress late in 2008 waived RMDs for 2009. The September 2009 clarification makes certain changes that affect individuals with RMDs. Many of these set or extend deadlines. Certain changes that affect plan sponsors are not covered in this article.
The IRS emphasized if the individual reached 70½ in 2008 the distribution should have been made by April 1, 2009, and if made after December 31, 2008, the distribution must be reported and tax paid on the individual’s 2009 income tax return.
An individual may receive a distribution from a plan and then take the money and put it in another plan (“roll it over”). The individual has 60 days to get the money from the distribution into the new plan. If an individual received a RMD distribution in 2009 from an IRA, the individual may roll it over, including to the same plan (and avoid taxability in 2009). The deadline is November 30, 2009, not 60 days from the date of distribution. The one rollover per year rule applies, however, so the individual must wait until one year from the date of any previous rollover. If an individual received in 2009 a RMD or one or more payments in a series of substantially equal distributions that included a RMD from a plan which is not an IRA, the individual’s deadline for rollover, including the RMD, is November 30, 2009, not 60 days. If the plan permits, the rollover may be back into the original plan. If more than one distribution was received in 2009, the first distributions are from any prior years’ RMD distributions not distributed previously (taxable in 2009 and not eligible for rollover), followed by 2009 distributions which may be rolled over by November 30, 2009.
Generally, the RMD rules ensure that the plan payout is over the lifetime of the individual employee. The employee can have a plan that has as beneficiaries the employee and one or more other beneficiaries who will inherit the balance in the plan at the employee’s death. One of the persons other than the employee is the “designated beneficiary”. The plan RMDs extend the payout over the joint lifetimes of the employee and the designated beneficiary.
Certain deadlines that apply to individuals that inherit the balance in plans were extended. If the deadline for survivors making a 5 year rule or life expectancy rule election would be the end of 2009, the deadline is automatically extended to the end of 2010. The deadline for a non-spouse designated beneficiary making a direct rollover and life expectancy rule election is the end of 2010 for employees who died in 2008.
What has not changed:
A determination of designated beneficiary will be made as of survivors who are in the plan on September 30 following the year of death. The trustee of a trust that is a designated beneficiary must provide the plan administrator certain information by October 31 following the year of death. Separate accounts for more than one beneficiary of the balance in a plan at the employee’s death to be effective must be established by the end of the year of the year of death. A rollover made less than one year after a previous rollover is taxable. Periodic payments made to individuals under 59½ are not waived and if stopped, unless because of death or disability, are subject to recapture tax.
Harris R. Angell, Jr. is a corporate and tax attorney with Tom Bolt & Associates, P.C., a full service business law firm in St. Thomas, Virgin Islands with a practice concentration in banking, real estate, corporate and commercial law and litigation, estate planning, family law and tax.