Worker, Retiree and Employer Recovery Act of 2008 - 12/24/08
Kim: the President just signed a new pension law, the Worker, Retiree and Employer Recover Act of 2008 that impacts how much money you can take out of your IRA and 401k. Here to discuss what the new law means to you is attorney Michael Solomon.
Kim: The new pension law makes some changes in when people have to take money out of their ira in 2009. How does the law work?
Mike : First lets understand the basic rules.
- Mandatory Distributions - If you turn 70-1/2 in 2009, the old law required you to take out a minimum distribution from your IRA or other retirement plan by April 1 of 2010. Then you have to takeout one more distribution by December 31 of 2010. After that you just have to take on minimum distribution a year.
- Minimum Distribution- A minimum distribution is the amount you have in your IRA as of the end of the prior year divided by your life expectancy. The first distribution due on April 1st goes back two years.
- Penalties - If you don't take out your minimum distribution on time the IRS penalizes you by charging you 50% of what your distribution should have been and you still have to take the money out. You could end up owing over 90% of your distribution in taxes if you mess up.
If you turn 70-1/2 in 2009, the new law allows you to skip the distribution that is due on April 1, 2010, but not the December 2010 distribution. And if you turned 70-1/2 in 2008 you are out of luck. You need to take your first distribution out by April 1 of 2009 and your second by December 31, 2009.
Kim: Why did Congress make this change?
Mike: After the collapse of the stock market Congress did not want to force retirees to shrink their IRA by taking money out of the IRA and pay income taxes while their IRAs are already shrinking from the market collapse. However it protects only the people turning 70-1/2 in 2009. If you turned 70-1/2 already or will in 2010, the new law doesn't help you.
Kim: Do you have any planning tips for IRAs and 401ks.
Mike: Here are a couple of tips:
- Beneficiary Forms- Fill out your IRA or retirement plan beneficiary form by naming for example your spouse, child or a trust as a beneficiary. The beneficiary form not your will says who inherits your IRA. If you don't fill it out your IRA through probate and could cause higher income taxes on your inherited IRA
- Don't liquidate IRA- Your IRA does not have to liquidate on death. It can pay out over the life expectancy of the person inheriting the IRA. This can be a great benefit for your children and grandchildren. For example if a grandchild inherits your ira and takes distributions out over his life expectancy a $50,000 IRA could grow to be worth a half a million dollars over the life expectancy of the grandchild.
Your IRA is one of your largest assets you should sit down with a knowledgeable advisor who has your interests at heart to get the proper planning advice.
Kim : Thank you