Academic journal article Journal of Accountancy

Taking Advantage of the RMD Holiday for IRAs

Academic journal article Journal of Accountancy

Taking Advantage of the RMD Holiday for IRAs

Article excerpt

For 2009 only, the required minimum distribution (RMD) rules applicable to retirement plan withdrawals have been waived. This allows retirees to forgo a year's distributions. The benefit of this suspension may seem obvious: The beneficiary can defer taxable income and hopefully the holdings--likely battered over the past year--can recover before being further depleted. However, beneficiaries should consider some planning opportunities before the suspension expires at the end of this year.

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BACKGROUND

In general, the RMD rules apply to various traditional IRAs (not including Roth IRAs) and defined contribution plans sponsored by employers. They call for distributions to commence by April 1 of the year following the calendar year in which the beneficiary turns 70 1/2 years of age or, if later, April 1 of the year following the year of retirement in the case of an employer-sponsored plan if the recipient owns less than 5% of the sponsoring entity,

PLANNING OPPORTUNITIES

The RMD holiday provides some flexibility: Forgoing the distribution is optional; it is not an all-or-nothing provision. The recipient may withdraw any amount, down to and including $0. Because a plan participant may take a distribution as late as the last day of the year, the participant is in a good position to take a distribution that optimizes tax savings.

If a taxpayer has unusually high medical expenses, much of the income resulting from an IRA distribution may be shielded from tax. Excess medical expenses cannot be carried over to another tax year, so the deduction will be lost if not offset.

An individual with charitable contribution carryovers that will soon expire may wish to take an IRA distribution to avoid permanently losing the deduction.

Unlike medical expenses, net operating losses (unfortunately common for 2008 and possibly 2009) can be carried over, but they, too, can partially or fully offset otherwise taxable income resulting from a pension distribution. …

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