Before exploring this new change in the legislation we should first understand what the RMD represents. RMDs generally are minimum amounts that a retirement account owner must withdraw annually starting with the year that he or she reaches 70 1/2 years of age or, if later, the year in which he or she retires. However, if the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account owner is age 70 1/2, regardless of whether he or she is retired. An account owner must take the first RMD for the year in which he or she turns 70 1/2 . However, the first RMD payment can be delayed until April 1^st of the year following the year in which he or she turns 70 1/2. All subsequent RMD payments must be made by December 31 of the applicable year. If an individual waits until April 1 of the following year after they turn 70 1/2, they wind up with two distributions’ one relating to the prior year and one for the current year.

The RMD rules apply to all employer sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD rules also apply to traditional IRA’s and IRA-based plans such a SEPs, SARSEPs and SIMPLE IRAs.

In general, the RMD is calculated for each account a retiree has by dividing the prior December 31^st balance of that IRA or retirement plan account by a life expectancy factor published by IRS. There are three separate tables that may apply: (1) The Joint and Last Survivor Table is used by an account owner whose sole beneficiary of the account is his or her spouse and is more than 10 years younger than the account owner; (2)The Uniform Lifetime Table is used by account owners whose spouse is not the sole beneficiary or whose spouse is not more than 10 years younger than the account owner; and (3) The Single Life Expectancy Table is used by a beneficiary of an account.

The IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. The same holds true for 403(b) accounts. RMDs required from other types of retirement plans such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts. You are allowed to take more than the RMD, if so desired. Taking more than the RMD in any given year does not relieve the account owner from having to take the RMD in future years.

Failure to withdraw a RMD by the deadline will subject the account holder to a 50% penalty of the RMD. For example: Mr. Smith is in the 28% tax bracket and has a RMD of $20,000 for the year which he did not take. The effect would be as follows:

$20,000 X 50% = $10,000 penalty and $5,600 regular tax. This leaves Mr. Smith with $4,400 left from the original $20,000 distribution. Waiver of these penalties is possible, if a reasonable explanation is provided for the oversight, but the IRS is not charitable in granting these waivers.

In general, distributions from a traditional IRA are taxable in the year they are received; even if they are made without your consent by a state agency as receiver of an insolvent savings institution. In regards to the state agency situation, the income must be included in the gross total unless rolled over into another IRA. One way of avoiding the pickup of the RMD into income is by the direct contribution of the account owner’s RMD to a qualified charity. In this instance, the account owner would not pickup any income related to the RMD and would not take the deduction for the charity. By not picking up the RMD in gross income, tax has been reduced on a dollar to dollar basis.

Let’s look at the 2008 Act signed into law by President Bush on December 23, 2008. Under this act, a suspension has been placed on the RMD for the 2009 tax year meaning no RMD is required for 2009. With the economic turbulence of the 2008 year, many retirees have been severely affected by the sharp decline in the value of their retirement savings accounts. By leaving the RMD rules to exist as they were, this would have forced retirees to further deplete their tax –deferred accounts when they are already at record lows.

For the individual who turns 70 1/2 in 2009, distributions are not required until December 31, 2010 (this represent the 2010 RMD).