During the past couple of months there have been a lot of discussion about the possibility that Congress or the Treasury will waive the required minimum distribution (RMD) rules on employer-sponsored retirement plans and traditional IRAs for 2008. However, with less than a month to go before the end of the year and still no changes to the current rules, time is running out to take your distribution.
The current RMD rules generally require those who are at least age 70½ to take annual distributions from their traditional IRA accounts. If you are retired and at least age 70½, you are also required to take RMDs from your employer-sponsored retirement plan. Required minimum distributions are mandated by the federal government so that tax deferred balances in those accounts do not accumulate indefinitely. The minimum amount that you are required to take each year is calculated by taking the previous year’s account balance as of Dec. 31 and dividing it by the appropriate life expectancy factor given by the IRS. Therefore, RMDs for 2008 would be calculated using the account balances for Dec. 31, 2007. Failure to take some or all of your RMD comes with a stiff, 50 percent tax penalty of any shortfall.
A proposed rule change would waive the requirement to take a distribution in 2008. One of the objectives of granting a waiver would be to provide relief to those who would have to sell investments in their accounts to make a cash distribution. Since the values of many investments have declined so sharply over the past year, most investors would need to sell a larger portion of their account to make a cash distribution. In addition, the waiver would provide flexibility for those who may not need their RMD as a source of income to choose whether or not they wanted to withdraw it (and pay ordinary income tax on the distributions) or leave it in their account.
While there are still a few weeks for Congress or the Treasury to act, time is running out. If Congress or the Treasury fails to provide the wavier you may find yourself scrambling to get your distribution made. Unless you turned 70½ this year, your deadline to withdraw your RMD is Dec. 31. If you turned 70½ in 2008 you have until April 1, 2009 to take your initial distribution. Financial institutions are usually pretty busy this time of year fulfilling RMD requests and Roth IRA conversions. Therefore, you should contact your financial institution and inquire about any deadlines or delays they may have to complete your RMD request.
On a final note, if you don’t need your RMD as a source of income it may still be a good strategy to delay taking your distribution until as late as possible but keep an eye on the calendar. If the waiver is not granted you may be left with very little time to complete your RMD and avoid the penalty.
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