Required Minimum Distribution Reprieve
The economic downturn of late 2008 and early 2009 took a toll on Americans’ retirement savings. According to the Employee Benefit Research Institute, median asset levels in 401(k) and IRA/Keogh plans dropped at least 15% from year-end 2007 to mid-June 2009. Fortunately, as the economy has turned around this year, those retirement assets have grown – assuming plan holders left the bulk of their money in the market.
However, leaving your money untouched is impossible if you’re required to take an annual minimum retirement plan distribution. Recognizing this dilemma, the federal government passed the Worker, Retiree and Employer Recovery Act of 2008 in December. Under this Act, retirement plan holders do not have to take Required Minimum Distributions, or RMDs, from their plans in 2009.
According to Robert Diedrich, Executive Vice President and Trust Division Manager for First Midwest Bank, this law can help retirees save money in the long run. “The equity markets dropped dramatically in 2008 and have begun to improve in 2009,” Diedrich says. “By foregoing the RMD in 2009, retirees have the potential of future gains in their portfolio if the markets continue to rally. If they were forced to take an RMD, assets may be sold at still depressed levels.”
Although the Act has been in effect since the beginning of the year, the RMD waiver is important to think about as 2009 comes to a close because many retirees wait until the end of the year to take their RMDs. In addition, whether or not retirees take an RMD will affect their 2009 taxes, Diedrich says.
“Retirees benefit by not having to take an RMD in 2009 because they’ll have less taxable income, which results in a lower tax to pay,” he says.1
Assessing Your Retirement Income Needs
Before choosing not to take your RMD for 2009, it’s important to assess your specific financial situation. For example, how much do you rely on your retirement account distributions each year? Do you have other retirement income sources, such as Social Security, pension payments and payments from your investment portfolio?
“The most important decision will be a cash flow decision,” Diedrich says. “Can your income inflows cover your expense outflows?”
Diedrich advises that if other sources of income exist and you do not anticipate any major expenses during the year, you should consider foregoing any 2009 distributions. And if an unanticipated expense does occur, a distribution can still be taken, even if it is less than the traditional RMD amount, he says.
If you choose not to take a distribution in 2009, you might need to reassess your budget to make up for your smaller annual income. Diedrich suggests getting a good sense of your inflows and outflows, and looking into savings in your taxable accounts to help with expenses. A First Midwest Trust Relationship Manager or First Midwest Financial Network Consultant can help retirees develop a budget template and identify income sources in case extra funds are needed, which, according to Diedrich, is the most important step to take.