Required Minimum Distributions Restart in 2010

Employer-sponsored defined contribution retirement plans (profit sharing plans, 401(k)s, etc.) and IRAs are subject to so-called, required minimum distribution rules.  The rules generally apply upon attainment of age 70 1/2 or after the death of the retirement account owner.  A 50% penalty of the RMD amount applies to failures to distribute the required amount.  The rules and penalty are designed to force out retirement savings so that they will be subject to income tax during the owner's retirement years and to prevent the use of retirement accounts solely as an inheritance vehicle.  The government enacted a one-year waiver of these rules for the year 2009 in response to the 2008 stock market crash.

Now that the waiver is over, what are the general implications for 2010?

• Those who attained age 70 1/2 prior to 2009:  use the account value as of December 31, 2009, the Uniform Lifetime Table factor for their attained age in 2010, and make the distribution no later than December 31, 2010.
• Those who attained age 70 1/2 in the year 2009:  use the account value as of December 31, 2009, the Uniform Lifetime Table factor for their attained age in 2010, and make the distribution no later than December 31, 2010.  The special rule that allows a deferral of the first RMD to April 1st of the calendar year following the year age 70 1/2 is reached does not apply.
• Those who attain age 70 1/2 in 2010:  regular RMD rules apply (including deferral of the first RMD to April 1, 2011) as the waiver has no effect.
• Beneficiaries using the five-year payout method:  the year 2009 is not counted as one of the five years.
• Beneficiaries using the lifetime payout method:  use the account value as of December 31, 2009 and apply the life expectancy factor from Single Life Table using the normal rules.

RMD rules can be quite complicated to apply and the one-year waiver for 2009 introduces some uncertainty into the process of restarting the RMDs in 2010.