RMD changes for '09?

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Dec 15, 2008 4:04 pm

Anybody else hearing the chatter about RMD rules being changed/suspended for '09?

Dec 15, 2008 4:27 pm

Jones sent out an email to us to let us know that may be in the works.  They said it's not a done deal, so don't start telling your clients that they won't have to do an RMD in 09. 

Dec 15, 2008 4:57 pm

Can someone give me a realistic example of how this will be truly helpful to someone.  If I understand this correctly, it's a fairly meaningless gesture.  I'm posting because I'm curious if I'm wrong.

Dec 15, 2008 5:15 pm

Although the option to take a distribution in kind is always there, some folks will always sell and take the cash.  So, this would avoid forcing the sale to make the RMD while values are down.

Dec 15, 2008 5:30 pm

Exactly.  Since nobody is forced to sell their holdings, what's the point of suspending RMD's?  I would argue that for those who don't need RMDs, 2009 is a great year to take them...and take extra...at least to fill up their tax bracket!  For those that need the money, suspending RMDs don't do any good because they need the money.  If one needs the money, the money shouldn't have been in equities.


Who is helped by a suspension of RMDs following a terrible market year? 

Dec 15, 2008 6:03 pm

You're going to have to explain the thought that 2009 is a great year to take an RMD or even extra. 

 
I think two things come into play here.  First, is purely a keep the money in the market idea.   Sure they can do an in kind distribution, but a lot of them don't.  That selling is going to force the market down.  Second, even if they take the in-kind distribution, they're still going to have the corresponding tax bill.  Sure, tax rates are probably going to go up in 2010.  But why incur the tax bill now if you don't have to?  If those retired folks (who are currently holding a ton of the liquid money sitting on the sidelines right now) could spend that money on something other than taxes, it might just help the economy.  If we could get them to all buy new Plasma TVs we might get the economy heading in the right direction. 
Dec 16, 2008 12:52 pm

the answer is that to take 5% or whatever of LAST YEARS BALANCE could now be 8-10% of current balance in an all-stock (or stock/corp bond) portfolio. Folks dislike that--politicians are listening.

Dec 16, 2008 8:21 pm

"the answer is that to take 5% or whatever of LAST YEARS BALANCE could now be 8-10% of current balance in an all-stock (or stock/corp bond) portfolio. Folks dislike that--politicians are listening."
 
Aren't you going backwards in your calculation?  Ex. 12/31/2007 balance $100,000; 2008 RMD $5000.  12/31/2008 balance $50,000; 2009 RMD $2550.  Their RMD for 2009, in your example would go from 5% to about 2.5-3% and not to 8-10%.   An RMD suspension for 2008 could have been helpful, but not an RMD suspension for 2009.   For aggressive portfolios, RMDs are already cut in half with no Congressional input.
 
"You're going to have to explain the thought that 2009 is a great year to take an RMD or even extra."
 
First of all, like I mentioned since the 12/31/08 balance will be lower, the RMD will be much lower.  Let's forget about the people who need the money.  An RMD holiday is useless to them because they need to take this money.  Therefore, this primarily effects the people who don't need the money. 
 
The "selling low" issue is a complete non-issue because the removal of an RMD does not force someone to liquidate their holdings.  One who is taking an RMD, but doesn't need the money is one who probably will die with money and not broke.  If the money stays in the IRA, more tax deferred growth will occur.  Ultimately, the money will come out and income taxes will be paid.   For some of this money, it will be post death.  Instead, if money comes out in 2009, especially to the extent that it can fill out some lower tax brackets, it can then grow tax free instead of tax deferred.  
 
I'm referring to the fact that it can be invested in such a way that the ultimate gains will be capital gains, but the step up in basis at death, will allow the assets to pass tax free.
 
If there are no RMDs, the money won't get spent because the money will stay in the IRA, so your idea of stimulating the economy won't work.
 
P.S. I'm thinking out loud on this subject more than I'm trying to espouse a strong viewpoint.  I think that the reality is that it doesn't make much of a difference.
 
 
 
 

Dec 16, 2008 9:00 pm

anon- a 5000 RMD taken today in your example is 10% (of approx current balance of 50k) not 2.5%. This is a major reason why folks clamored for a waiver--because they wait about 11.5 months from the time the RMD was calculated to actually take it

Dec 17, 2008 12:35 am

In regards to "not having to sell the securities":
Do you want to deal with a brokerage account for every damn rmd position where you don't cash it out?  I don't.  Thus this is a good thing if it goes through

Fixed Annuity/CD clients: I've got plenty of people who are telling me to stop their RMD so that they have even more interest compound. 

As far as I can tell, this is a great thing for my clients who are already wealthy enough to handle this downturn, and don't want to take draws on their retirement accounts.  The sad part, as usual, is that it's not helping people who need the help

Dec 17, 2008 6:38 am

"anon- a 5000 RMD taken today in your example is 10% (of approx current balance of 50k) not 2.5%. This is a major reason why folks clamored for a waiver--because they wait about 11.5 months from the time the RMD was calculated to actually take it"
 
Yes, but they aren't getting a waiver for this RMD.  That is the 2008 RMD which must still be removed.   It is the 2009 RMD that won't have to be removed and that is an RMD that will be based upon a much smaller number.  A waiver for the 2008 RMD may have made sense and made a difference. 
 
"Do you want to deal with a brokerage account for every damn rmd position where you don't cash it out?"
 
Sure, why not? It's not that I especially want to do so, but it wouldn't be very hard.  The client is probably going to have a brokerage account with me regardless.  Even so, it's not an issue. A client shouldn't be in a position that they have to sell a security to get an RMD payment.  None of my clients will be selling securities to get their RMD payment.
 
"Fixed Annuity/CD clients: I've got plenty of people who are telling me to stop their RMD so that they have even more interest compound."
 
I agree with this.  However, I don't see much of this in my practice.  This is because these type of clients fit into two categories.  1)They need the RMD to supplement their living expenses.  2)They don't need their RMD and are planning to leave money at death.  If this is the case, we often have them take their RMD and use it to purchase life insurance.   However, what you are saying is certainly a positive for others. 
 
"As far as I can tell, this is a great thing for my clients who are already wealthy enough to handle this downturn, and don't want to take draws on their retirement accounts."
 
If this money is ultimately going to the next generation because it's money that they don't need, I disagree.  If this is money that is ultimately going to get spent by the retiree, then I agree...maybe.  
 
Let's use a quick, overly simplistic example of a client who would have a $10,000 RMD but is choosing not to take it.  Let's assume 35% combined federal and state taxes.  Let's also assume that this money gets a 10% return.  If they don't take it, they will have $11000 next year.  After tax, this will be worth $7150.  If they take it now and then invest it, in one year it will be worth $7150.   Credible arguments can be easily made on both sides which is better.
 
"The sad part, as usual, is that it's not helping people who need the help"
100% agreement.

Dec 24, 2008 9:21 am

Anon, bottom line, many of my clients don't need/want the distribution, but want their funds to continue growing tax deferred.  Many fo them are openly annoyed about the tax bill, regardless of any tax strategy or whatever.  They simply don't want a tax bill for money they don't want to use.  For many, it's earmarked for their children, so the timeframe may be years/decades away.  So why pay taxes today, when it could be estated to their children and allow them to stretch withdrawals over their lifetime?? 

Dec 24, 2008 11:35 am

I get that they don't like the idea they have a tax bill this year, but what were they expecting?  To never pay taxes?  Were they never explained the concept of RMDs?
 
Anon alluded to an idea in his previous post:  why not take the RMD and purchase either a WL policy or GUL policy?  Cash surrender value grows tax-deferred and the heirs get the money tax-free.  Thus, worrying about future tax rates goes out the window, having to stretch the IRA is less a concern, and the client has more flexibility to utilize other assets for other purposes (college/inheritance/income).  Ultimately, if the IRA is to be used for an inheritance, life insurance is a far more effective use of those dollars than a stretch IRA.
 
Dec 24, 2008 11:46 am
deekay:

I get that they don't like the idea they have a tax bill this year, but what were they expecting?  To never pay taxes?  Were they never explained the concept of RMDs?
 
Anon alluded to an idea in his previous post:  why not take the RMD and purchase either a WL policy or GUL policy?  Cash surrender value grows tax-deferred and the heirs get the money tax-free.  Thus, worrying about future tax rates goes out the window, having to stretch the IRA is less a concern, and the client has more flexibility to utilize other assets for other purposes (college/inheritance/income).  Ultimately, if the IRA is to be used for an inheritance, life insurance is a far more effective use of those dollars than a stretch IRA.
 
In theory, this is a great idea, however I've been able to successfully use it only 1 (one) time.  The insurability of my average 70+ y.o. client has been nigh unto impossible to obtain.  I'd much rather educate the client and benef. on the stretch ira concept, or not have to take the rmd at all.
Dec 24, 2008 1:30 pm
2wheeledbeemer:
deekay:

I get that they don't like the idea they have a tax bill this year, but what were they expecting?  To never pay taxes?  Were they never explained the concept of RMDs?
 
Anon alluded to an idea in his previous post:  why not take the RMD and purchase either a WL policy or GUL policy?  Cash surrender value grows tax-deferred and the heirs get the money tax-free.  Thus, worrying about future tax rates goes out the window, having to stretch the IRA is less a concern, and the client has more flexibility to utilize other assets for other purposes (college/inheritance/income).  Ultimately, if the IRA is to be used for an inheritance, life insurance is a far more effective use of those dollars than a stretch IRA.
 
In theory, this is a great idea, however I've been able to successfully use it only 1 (one) time.  The insurability of my average 70+ y.o. client has been nigh unto impossible to obtain.  I'd much rather educate the client and benef. on the stretch ira concept, or not have to take the rmd at all.
 
You're either not looking hard enough or you don't know where to look.  There are plenty of impaired-risk brokers who would shop the case for you.  In many cases, they're able to get the case issued and can "window dress" the client for better ratings.  Ask around for a veteran insurance rep who can help you. 
Dec 25, 2008 8:36 am

On Tuesday, December 23, 2008, President Bush signed into law H.R. 7327, the "Worker, Retiree, and Employer Recovery Act of 2008" which waives the 2009 required minimum distribution (RMD) from individual retirement plans (Traditional individual retirement accounts [IRAs], simplified employee pension [SEP] IRAs, and savings incentive match plan for employees [SIMPLE] IRAs, inherited IRAs including inherited Roth IRAs), defined contribution plans (401(k) plans, profit sharing plans, and money purchase pension plans), and 403(b)(7) custodial accounts.

Jan 4, 2009 8:12 pm

2008 distribution by April 1 2009 must still be made. New law is for 2009 distribution that can be skipped for 2010 distribution.

 
Stok