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On December 23, 2008, the Worker, Retiree, and Employer Recovery Act of 2008 (The Act) was signed into law by President Bush. The Act suspends the Required Minimum Distribution (RMD) rules for 2009 so that individuals can choose to keep their money invested in 2009 rather than be forced to withdraw from accounts that may have decreased in value.
IT CAN OFFER MAXIMUM ADVANTAGE
In 2002 the IRS issued final regulations regarding required minimum distributions (RMDs) for IRAs.1 These new regulations feature the Universal Method for calculating lifetime RMDs.2 From here on in, most first-time and subsequent RMD calculations will use the Universal Method. This method assumes a joint life expectancy based on a hypothetical beneficiary 10 years younger than the IRA owner. Generally speaking, the Universal Method calculation can reduce the amount of your annual RMD from what would have been calculated under the old proposed regulations. This could lower your potential tax liability. It's important to consider capitalizing on the 2002 final regulations by taking only the minimum amount that's required from your IRA. If other income is necessary, consider taking that income from taxable accounts.
Hypothetical assumptions
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You turn 70 1/2 and must start taking RMDs from your IRA.
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You have a $500,000 IRA and a $300,000 taxable account on 12/31 of the year prior to turning 701/2.
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You need $45,000 in after-tax income to supplement existing retirement income.
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You start taking annual withdrawals on 12/31 of the year you turn 701/2 and will continue to do so throughout your life.
| You could... |
Take all income from your IRA |
Take only the RMD from your IRA |
| Value on 12/31 of the year prior to turning 701/2 |
IRA: $500,000
Taxable account:$300,000
Total:$800,000
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Take $69,231 pretax annually from IRA for $45,000 of after-tax income needed.
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Leave taxable account untouched until IRA is depleted.
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IRA:$500,000
Taxable account:$300,000
Total:$800,000
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Take only annual RMDs from IRA.
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Fulfill the balance of income needs (including taxes on the RMD) with annual withdrawals from taxable account.
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Allow IRA to continue to grow tax deferred.
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| And 15 years later |
IRA: $0*
Taxable account:$360,815
Total:$360,815
*This IRA was depleted after 11 years.
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IRA: $688,364
Taxable account:$29,162
Total:$717,526 |
| This example illustrates hypothetical investments and is not indicative of the performance of any specific investment. It assumes the following: A 7% annual rate of return for all accounts and a flat 35% combined federal and state income tax. Earnings in the taxable accounts were taxed each year. This tax was paid by netting the tax against its respective earnings and was, therefore, not included in the gross distribution calculations needed to reach an after-tax income of $45,000. Distributions from the IRAs were taxed in the year they were distributed. Taxes on the IRA distributions were paid
by grossing up the distribution amounts from the IRAs or taxable accounts, as applicable. RMDs were calculated using the Universal Method and were taken starting in the year the individual turned
70 1 /2 . All distributions were taken on 12/31 of each year. |
When you take only the minimum distribution that's required, you may achieve greater benefits from tax-deferred compounding — more money stays in the IRA with the opportunity to grow tax deferred for a longer period of time. The end result can be more money for you throughout retirement and possibly more money to pass on to future generations.
Roll in the new and revisit the old
Talk with an advisor today
Now — in light of the 2002 IRS final regulations — may be a good time to sit down with your advisor to review your overall financial situation.
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Revisit and confirm your beneficiary designations.
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Since there's the potential for more of your money to grow tax deferred for a longer period of time, consider increasing the percentage of your portfolio invested in stocks to enhance your potential for growth.
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Think about simplifying your paperwork and your portfolio management and distribution strategies — consolidating your retirement accounts can help you do this.
These are just a few of the many points you should cover with your advisor. Set up an appointment today.
RMDs are required
Make sure you take them each year and from all retirement accounts that require them. Did you know that each year you miss a distribution you could be subject to a 50% penalty on any amount that should have been distributed? In addition, you'll owe ordinary income tax on the delayed distribution. This can put a big dent in your retirement savings and your legacy.
Better distribution options for beneficiaries
Under the 1987 proposed regulations, your children's and grandchildren's distribution options had limitations — worst case scenario, your beneficiaries would have to deplete your account by December 31 of the year following your death. Now, if your children are named beneficiaries on your IRA, they could take distributions based solely on their own life expectancies (when certain requirements are met). This may further extend the life of your IRA, allowing assets to remain invested and potentially benefit from tax-deferred compounding for the longest period of time possible.
1. Required minimum distributions (RMDs) from IRA accounts must begin to be taken by the required beginning date (RBD). This date is April 1 of the year following the year in which the IRA account owner turns 701/2. Note that there are no RMD requirements for Roth IRAs during the account owner's lifetime; RMD requirements do apply to Roth IRAs after the account owner's death.
2. The Spousal Exception Method is also available under the 2002 final regulations for investors who have named their spouse as their sole beneficiary, provided the spouse is more than 10 years younger than the IRA owner. Contact your advisor for more information about this method.
3. Equity investments generally involve greater risk than other investments, including the risk of possible loss of principal. Investors should carefully consider their time horizon, tolerance for risk, and personal situation when considering investment options.
CRN0210-7531
Fidelity Investments & Pyramid Design is a registered service mark of FMR Corp.
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