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The Confusion Over Required Withdrawals

By Michelle Singletary
Thursday, February 5, 2009

What lessons can we learn from the high-profile tax cases of newly installed Treasury Secretary Timothy F. Geithner and Thomas A. Daschle, President Barack Obama's failed pick for secretary of health and human services?

How about that the darn tax code is so complex and long that Geithner and Daschle did what so many others have done -- messed up big time? Geithner had to pay the government $43,000. Daschle recently wrote a check for $146,000.

Because we have no evidence that Geithner and Daschle intentionally cheated, I'm willing to give them the benefit of the doubt. But I'm getting tired of appointees with tax issues. If these folks have the money to get their taxes prepared correctly and still can't, the IRS better give enormous leeway to regular taxpayers.

That brings me to a recent tax change that I'm sure will cause a lot of taxpayers to make mistakes. It concerns the required minimum distribution that seniors have to make from their retirement plans.

For 2009 only, there will not be the usual required minimum distributions from retirement plans such as 401(k)s, Roth 401(k)s, 403(b)s and certain 457(b)s. The distribution rules also apply to traditional individual retirement arrangements and accounts and IRA-based plans such as Simple IRAs and SEPs (simplified employee pension plans), which provide employers with an easy method to make contributions toward their employees' retirement or the self-employed an easy way to contribute to their own.

Normally, tax law mandates that people with certain retirement plans take a minimum withdrawal every year after reaching age 70 1/2 . Those who fail to take the minimum distribution face a huge penalty. The amount not withdrawn is taxed at 50 percent.

I wrote about this one-year waiver and, not unexpectedly, some seniors had questions. Here are a few I received, along with answers from the IRS:

QAs a result of the law change, will it mean a double distribution requirement in 2010?

AIf you decide to skip a distribution for 2009, you will not have to double the amount required for next year. The waiver for 2009 is not a deferral.

Has there been any more discussion about providing tax relief for those who had to suck it up and make a withdrawal from their plans last year?

Sorry, the IRS does not anticipate providing any additional relief for those who had to take required minimum distributions in 2008.

My husband and I are examples of retirees whose assets have plummeted and who had to take the RMD last year. If we don't have to take anything this year, it will certainly help with taxes and, hopefully, give us an opportunity to rebuild our asset base. If one skips a year, what's the formula for the RMD for the next year?

In 2010, you would use the formula for that year. So you use the age that you will be in 2010 and apply the tables accordingly. Generally, the required payment is calculated for each account by dividing the prior Dec. 31 balance of that IRA or retirement plan account by a life expectancy factor, found in Publication 590 "Individual Retirement Arrangements (IRAs)." You can download the form or a "Required Minimum Distribution Worksheet" at http://www.irs.gov.

Is there any corresponding information for us federal retirees with TSP (Thrift Savings Plan) withdrawal requirements? I am under an automatic monthly withdrawal plan which, so far, is continuing. Can I stop it for 2009?

You can stop your monthly withdrawal payments, but only if your plan allows. Check with your plan.

My mother will turn 70 1/2 in March. She has not taken any distributions from her traditional IRA. Will she need to take a minimum distribution by April 1?

In this case, the mother does not have to take a distribution in 2009 because of the new law. However, she will have to take a required distribution for next year no later than Dec. 31, 2010, using her age in 2010.

My mother has been taking the minimum distribution on my deceased father's IRA since his passing more than 10 years ago. Does the change apply to deceased IRAs as well?

The rule does apply to an inherited IRA. So, this mom does not have to take a distribution in 2009.

If you have any additional questions, and I'm sure many of you will, contact the IRS toll-free at 800-829-1040 and then dash off a note to your congressional representatives pleading that they make the tax code less complex.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and at http://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail: singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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