What You Need to Know – Minimum Required Distributions
There has been a lot of confusion concerning the recent rule changes for Minimum Required Distributions (MRD’s) so I thought it would be good to provide you with more on information on MRDs, the recent rule changes and who it affects.
MRD Rules:
A Minimum Required Distribution (MRD) is the minimum amount anyone over 70 ½ and no longer employed is required to take from their retirement account annually. You would also be required to take a MRD if you are over 70 ½ and a 5% owner of the business sponsoring the retirement plan. The rule is in place to ensure retirees actually withdraw from their retirement account and use it for daily living expenses rather than passing it on to heirs.
The IRS does give you some flexibility on when to take the payment, but will also penalize you if you do not do so in time. According to IRS codes, the amount not withdrawn to fulfill the MRD is taxed at 50%. Most employer plans will send notifications to you prior to the end of the year you turn 70 ½ or leave employment that will indicate the amount of your MRD (The amount is based on your life expectancy and who you’ve named as a beneficiary – information your plan administrator should have). They will also provide you the option to push back the payment till April 1st the following year.
You will be required to pay taxes on any portion of the MRD that was pre-tax money, however; you will typically be given the option to designate how much you want withheld from the distribution (Your plan administrator is not legally required to withhold any taxes). Your plan’s rules will dictate what sources the money comes from, so it is possible it could be all after-tax money, pre-tax money or a combination of both. If you believe you are required to take an MRD and have not heard from your retirement plan, be sure to give them a call.
Recent Changes:
At the end of last year, the WRERA Act of 2008 was signed and as a result, MRDs are waived for IRAs, 401(k), Profit-Sharing, Money Purchase Pension, 403(b), and certain 457 retirement plans in 2009. This means anyone who was required to take an MRD in 2009, will not be required to now. However, if you were required to take one for 2008 and have not done so, you will still be required to do so prior to the April 1st deadline. For those who want to withdraw the previously required MRD amount, you can do so and either use it for living expenses or roll it over to an IRA. If you already received your 2009 payment, it is possible that it could be rollover eligible if it was paid to you less than 60 days ago. If you feel this is the case, be sure to check with your plan administrator to verify when the payment was made.
As we get closer to the April 1st deadline, be sure you have taken your MRD for 2008 if you are required to do so. The IRS will hold you responsible for the 50% penalty if the MRD is not taken, so it’s important that you contact your retirement plan to verify you have done so already. If you aren’t at the point of being required to take the MRD, be sure to pass along the information to someone who might be interested in the recent rule changes.
As always feel free to contact me if you have any additional questions.
Jeff Studebaker, Investment Advisor
