Retirement Plan Changes May Beneift You

If you are a participant or beneficiary of a 401(k), IRA or other type of qualified retirement plan, 2008 was likely a difficult year you would as soon forget. Many retirement accounts lost 30% or more of their values as a result of the precipitous drop in the stock and bond markets. For many, this evaporation of wealth was compounded by having to take a required minimum distribution, or RMD, from a retirement plan during 2008 (based upon the plan’s value at the end of 2007), further depleting the plan’s value. The Worker, Retiree and Employer Recovery Act of 2008, passed into law in December 2008, waives the requirement that retirees and beneficiaries of qualified retirement plans take an RMD in 2009. Additionally, this new law requires retirement plans to give qualified beneficiaries the ability to roll over their proceeds to an “inherited IRA,” thus allowing beneficiaries to stretch the payout of the benefits out over their life expectancies, potentially deferring significant amounts of income taxes.

Most retirees over the age of 70½ and beneficiaries of retirement plans know the yearly drill: make sure to take your RMD before December 31st each year, otherwise, substantial penalties may be imposed by the IRS. Depending on your age, the RMD is a percentage of the retirement plan’s value at December 31st of the prior year.

For 2009, whether you are a participant or beneficiary of a retirement plan, the law has temporarily changed so that you do not have to take an RMD. However, should you decide to withdraw money from the retirement plan, you will still be required to report and pay income tax on that amount. In addition, any amounts you withdraw in 2009 will not reduce or offset future RMDs. Looking forward to 2010, unless the law changes in the interim, you will once again be required to take your RMD pursuant to the applicable distribution schedule.

Although the IRS has waived RMDs for 2009, keep in mind that other laws may nonetheless, require a distribution to be taken. For example, certain persons receiving Medicaid may be required to take a distribution in order to maintain eligibility for the program. Failing to comply may have disastrous, unintended consequences.

One of the more positive developments in recent years was a tax law change allowing non spouse beneficiaries of retirement plans to roll over their benefits to an “inherited IRA,” thus enabling them to stretch payments (and therefore income taxation of the payment) over their life expectancies. This stretch feature allows the retirement plan benefits to grow on a continuing tax deferred basis. Prior to the law change, the ability to defer distributions was limited only to a spouse named as a beneficiary of a retirement plan or to qualified beneficiaries of an IRA.

Unfortunately, this tax law change did not require retirement plans to make the inherited IRA rollover an option for non spouse beneficiaries. Many retirement plans either did not offer inherited IRA rollovers or did so only with strings attached. In many cases, beneficiaries were required to withdraw plan benefits and pay income tax immediately, or over no more than five years.

Beginning in 2010, the law has been changed to require all qualified retirement plans to offer non spouse beneficiaries the opportunity to roll over their benefits to an inherited IRA. No longer will a retiree, during his lifetime, be required to roll over a 401(k) account to an IRA to give his or her children the ability to stretch out plan benefits over their life expectancies. Retirement plans have until 2010 to comply with the change, but you should take more immediate action. A review of the beneficiary designations on your 401(k), 403(b) or other retirement plans will ensure they meet your overall estate planning objectives, and that you take advantage of this highly beneficial planning opportunity. Our business clients with qualified retirement plans should make sure their retirement plans comply with these new provisions.

The challenges involved in dealing with retirement benefits can be overwhelming and complex. Significant opportunities for income tax deferral may be lost or overlooked. If you wish to learn more about retirement plan alternatives or other estate planning options, both Tim Muck, at (585) 324-5727 and Karen Schaefer, at (585) 324-5718, of our Trusts and Estates department are available to discuss your retirement and personal estate planning needs.