Should You Consider Recent Tax Developments When Planning For Your 2009 - 2010 Retirement Plan Distributions?

by Rick Dougherty, CPA

As the December 31, 2009 year end approaches, there have been some developments in the federal tax law that you may want to consider in planning for distributions from your retirement plan. These developments can be considered for their potential tax savings not only in 2009, but also in 2010 and future tax years.

Required Minimum Distribution (RMD) Rules Suspended for 2009

Individuals who have reached age 70 ½ are generally required to begin withdrawing funds from their IRAs or defined contribution retirement plans, including 401(k) and 403(b) plans. These withdrawals are known as Required Minimum Distributions (RMDs). The RMDs must begin by April 1 of the year following the year in which an individual attains age 70 ½. Amounts not distributed are subject to an excise tax of 50% and the individual is liable for federal income tax. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) enacted new laws which suspended RMDs for 2009.

In addition, the IRS recently announced that taxpayers who received a RMD from their IRA or qualified retirement plan at any time in 2009 can roll over the distribution tax-free through November 30, 2009. Distributions that include 2009 RMDs from a plan may instead be rolled back into the same plan if the plan permits such rollovers.

This development could be beneficial to individuals who don't need the cash flow from their 2009 RMD to live on. This would grant those individuals relief from withdrawing the RMD and paying the related ordinary income tax on their 2009 personal tax return.

Rollovers to Roth IRAs in 2010

Effective for 2010, individuals will be able to rollover funds from a traditional IRA or from an eligible employer retirement plan to a Roth IRA, regardless of their 2010 income level. Prior to January 1, 2010, individuals could only make such rollovers if their modified adjusted gross income did not exceed $100,000.

The amount rolled over to a Roth IRA will be reported as taxable income on the individual's personal tax return. However, the individual will have the choice of recognizing 100% of the income in 2010, or recognizing 50% of the income in 2011 and 50% of the income in 2012.

While it may seem counter intuitive to create taxable income by rolling over funds, many individuals anticipate increases in tax rates in the next 5 to 10 years. Some individuals may want to pay tax today to insure that future growth will be tax-free.

Please don't hesitate to contact us if you would like to discuss how these developments may apply to your personal situation.