Dear Friends of Our Firm,
A 2008 tax law temporarily suspended the rule for required minimum distributions (RMDs) from defined contribution plans (401k, 403b, etc.) and IRAs for the 2009 tax year. But plenty of confusion still exists.
To provide guidance, the IRS recently updated the frequently asked questions (FAQs) section on its web site. The updated web site notes that certain distributions from 401(k) and certain other plans made in 2009 for administrative convenience are not treated as RMDs.
Taxpayers can rollover such distributions to an IRA within 60 days and eliminate the related 2009 tax liability that would otherwise be due.
If a direct trustee-to-trustee transfer of funds is used, no income tax will be withheld from the distribution. Otherwise, plan administrators will automatically withhold 20% of the payout, even if the participant intends to complete a rollover within 60 days. The taxpayer must wait until his or her 2009 tax return is filed to recover the amount withheld.
The IRS web site also reminds taxpayers that the rule for RMDs is suspended only for the 2009 tax year – not the 2008 tax year. If someone turned age 70½ in 2008, he or she had to take the initial RMD by April 1, 2009. Failure to do so may result in a hefty 50% excise tax penalty.
On the other hand, clients do not have to take an RMD by April 1, 2010, if they turn age 70½ in 2009. Instead, the client must take the initial RMD for the 2010 tax year by December 31, 2010.
If a taxpayer needs cash, he or she can still take withdrawals this year, but he or she will be taxed on the portion representing deductible contributions and earnings.
Avoid New Withholding Snafu
For some retirees having tax withheld on pension distributions, the new Making Working Pay credit could create a dilemma. Reason: The IRS quickly revised its withholding tables to reflect the credit. But retirees without earned income are not eligible for the new credit, so they may be under withheld.
If you have any questions about the new law change for RMDs, please do not hesitate to call us at 262-754-4300.
