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Retirement Account Distributions: to Skip or Not to Skip

By Laura Rowley

January, 2009

If you are a retirement account owner age 70 or older, Congress gave you a special Christmas gift this year, or did they?

As a retiree in 2009, you may skip the required minimum distribution (RMD) from your retirement accounts. It is important, however, to answer a few questions regarding your personal situation to determine if you should put this gift to use.

Here’s how it works – Legislators passed a bill that suspends the distribution requirements for retirement accounts in 2009. Owners of most types of retirement accounts, including traditional IRAs and 401(k)s, are generally required to begin annual withdrawals after they reach age 70½. In exchange for the years of potential tax-deferred growth on investments, the federal government collects income tax on account owners’ withdrawals at ordinary-income rates. Keep in mind, you may still withdraw from your accounts in 2009, it is just not required.

The idea behind this "relief" is to allow retirement assets some time to recover from the declines they have experienced in the last year or so. Otherwise, you would have to sell assets at low levels to raise cash to meet your RMD. So instead of selling low and paying the IRS with those monies, you can stay invested and grow the account balance as the market recovers.

Although this sounds like a good action for you to take as a retiree, skipping your RMD may not be the best move for your individual financial situation. Before making this decision, there are some questions you should ask yourself and your CPA:

1. What will my tax bracket be in 2010? If your annual income is over $200,000, there is a strong possibility that your taxes will be higher under the Obama administration.

2. What will my age be in 2010? Being another year older means your factor will be lower and therefore your RMD will be higher.

3. Will the market recover quickly or slowly? This question is not as easy to answer as the first two. The quicker the recovery, the higher your balance will be on December 31, 2010. This amount will be used to calculate your 2010 RMD.

4. Will I be subject to the Alternative Minimum Tax (AMT)? The AMT exemption has dropped significantly this year. In 2008, the exemption was slightly less than $70,000. Presently, it is approximately $45,000. If you normally have significant RMDs relative to your other sources of income, particularly if they are generated via municipal bonds, you could be subject AMT if you skip your 2009 RMD.

The economic value of this "relief" provision seems somewhat limited if you have sufficient assets to avoid withdrawals from retirement accounts. It is more valuable if you are concerned about depleting your reduced retirement account balances.