On December 23, 2008, President Bush signed into law the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA). Contained within this law are many technical corrections to the Pension Protection Act of 2006 (PPA) affecting both IRAs and Employer Sponsored Qualified Retirement Plans. Below are three provisions in WRERA that affect IRAs. Two of which are currently in effect and one will become effective for 2010 and later plan years.
1. Waiver of Required Minimum Distribution (RMD) rules:
Effective for the 2009 tax year, WRERA contains a provision waiving RMD requirements for IRAs as well as for employer sponsored qualified retirement plans such as 401(k) plans, 403(b) plans, and governmental 457(b) plans. RMDs are waived for IRA holders, plan participants, and for beneficiaries who are normally required to take beneficiary distributions.
The specifics of the RMD waiver are:
- All RMDs for the 2009 tax year, whether they are due by 12/31/2009 or by 4/1/2010 (for taxpayers taking their first RMD), are waived. This means that your next RMD will be required for tax year 2010 and due by 12/31/2010. If your required beginning date is 4/1/2010 (for taxpayers whose first RMD is due for tax year 2009), this does not mean it is now extended to 4/1/2011. Instead, your first RMD will now be required for tax year 2010 and due by 12/31/2010.
- In regards to beneficiary distributions from inherited IRAs, if the distribution payment option you elected was:
- Life expectancy payments, then your RMD for tax year 2009 is waived. This does not mean the life expectancy used for calculating your RMD is extended. It means your 2009 RMD is ignored and your next RMD will now be required for tax year 2010 using the life expectancy that normally would have been used to calculate your 2010 RMD.
- 5-year Rule, then your RMD for tax year 2009 is ignored which in effect results in your 5-year period now becoming 6-years. For example, if an IRA holder died in 2008, the 5-year rule states that you must close out the IRA by December 31st of the year containing the 5th anniversary of the IRA holder's death. In this example, that date would now be 12/31/2014, instead of 12/31/2013.
- A distribution from an employer sponsored retirement plan taken in 2009 which is not taken as an RMD because of the waiver, is not subject to the mandatory 20% income tax withholding and may be rolled over into an IRA or another employer sponsored qualified retirement plan within 60 days of the distribution.
2. Option in Employer Sponsored Retirement Plans to allow Non-Spouse Beneficiary Rollovers to IRAs will soon be required:
PPA contains a provision which makes it possible for employer sponsored retirement plans to allow non-spouse beneficiaries of a deceased plan participant to directly rollover inherited plan assets into an "Inherited IRA" making it possible for the non-spouse to "stretch" distributions from the inherited IRA over his/her life expectancy. However, PPA does not require employers to offer this option to non-spouse beneficiaries. WRERA contains a provision that becomes effective for 2010 and later plan years which will require employers to offer this option to non-spouse beneficiaries.
3. Rollovers into Roth IRAs:
Eligibility requirements associated with converting a Traditional IRA to a Roth IRA (i.e. taxpayers must have modified adjusted gross income of less than $100,000 and if married, are required to file a joint income tax return) were retained by a provision of PPA which prevented certain rollovers of designated Roth 401(k) and Roth 403(b) plan assets into Roth IRAs. WRERA eliminates the eligibility requirements for these transactions and makes it retroactively effective on January 1, 2008.
Since we are on the topic of Roth IRAs, I would like to point out a very significant provision of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) which became law in May 2006. For tax years prior to 2010, a taxpayer is prevented from converting a Traditional IRA to a Roth IRA if they do not meet the eligibility requirements associated with conversions (i.e. taxpayers must have modified adjusted gross income of less than $100,000 and if married, are required to file a joint income tax return). TIPRA eliminates this limitation effective for tax years beginning in 2010. If you have a Traditional IRA, you will then be allowed to convert it to a Roth IRA regardless of your modified adjusted gross income and your tax filing status. Keep in mind that any previously untaxed money in the Traditional IRA that gets converted to a Roth IRA will be taxed at ordinary income tax rates. However, a special rule included with this law affects conversions occurring in tax year 2010. If you convert your traditional IRA to a Roth IRA in tax year 2010, for that tax year only, unless you elect otherwise, income tax due on the amount converted can be paid over a two year period; half reported in 2011 and half reported in 2012.
Continuously changing laws, rules, and regulations pertaining to IRAs can be very complex and overwhelming. Canandaigua National Bank and Trust can help you understand these ongoing topics and help you develop a long term strategy designed to protect your retirement income and maximize your retirement plan benefits. For more information contact Mark Mazzochetti at (585) 419-0670, ext. 50606 or email him at MMazzochetti@cnbank.com .