Taxes and new RMD waiver may not mix

A new law that gives retirees greater latitude in taking required minimum distributions could have negative tax implications, according to advisers.

The Worker, Retiree and Employer Recovery Act of 2008, signed into law on Dec. 23, waives RMDs from individual retirement accounts and 401(k), 403(b) and 457(b) plans this year.

For retirees who don’t need in-come from retirement accounts, eliminating the 2009 RMD would likely help nest eggs rebound from the current market slump. But if someone is over age 701/2, the age by which required withdrawals must begin, and has low income, taking a distribution while in a lower tax bracket may make sense, said Bruce Primeau, a certified public accountant and vice president of Wade Financial Group Inc. in Minneapolis. His firm manages $160 million in assets.

“While they may not have to take the full required minimum distribution, it may make sense to take $5,000 or $10,000 and pay almost no income tax on it,” Mr. Primeau said.

Many of his clients have 12 to 24 months of cash on reserve, and he believes it may be worthwhile to get clients to take the RMD while taxes are lower instead of waiting for the expected hike in rates.

“Let’s get the cheap money,” Mr. Primeau said. “I don’t think [President] Obama will raise tax rates in 2009, but he probably will in 2010.”

The new law doesn’t make a lot of sense to adviser Morris Armstrong, owner of Armstrong Financial Strategies in Danbury, Conn., who manages $10 million in assets.

“The people who have to take the required minimum distribution are going to take it anyway, and really all [the law] does is defer the tax collections for the government in a year when we certainly need revenue,” he said. “It’s pandering to all seniors.”

A few of Mr. Armstrong’s clients have to take their required minimum distribution, but he’s looking at their situations case by case.

“This all goes back to bigger issues. If all of your money is tied up in a retirement account, you have to take out money,” Mr. Armstrong said.

“If you have different pools of money, you have flexibility,” he said.

“I have some clients with much more money in their brokerage accounts as opposed to their individual retirement account and they don’t have to take the required minimum distribution.”

John Bowen, a certified public accountant and principal of Bowen Financial Services LLC in Midlothian, Va., suggested to some of his clients that they take the distribution to move the assets from a regular IRA to a Roth IRA.

“You need to know your clients’ tax brackets for it to work,” said Mr. Bowen, who manages $30 million in assets. About 10% of his clients are affected by the new law.

The law creates a wrinkle for sole proprietors, such as doctors or lawyers, who work beyond age 701/2 and contribute to a defined benefit plan, said Brett Goldstein, president and pension administrator of the Pension Department LLC , an actuarial firm in Plainview, N.Y.

As contributors to a DB plan, they’re still required to take the required minimum distribution, which is unfair, he said.

“If you take two people, one with a defined benefit and one with a defined contribution plan, the person with the 401(k) gets to keep their money and the person who has the defined benefit plan has to take required minimum distributions,” Mr. Goldstein said. “The whole point is to allow account values to recover.”

If clients need the cash, then there’s no question they will have to take the required minimum distribution, said Steve Podnos, an adviser with Wealth Care LLC in Merritt Island, Fla. He manages $100 million in assets for about 70 families.

Mr. Podnos also suggested that clients wait until yearend to take a distribution if they can, because the markets may have recovered by then.

E-mail Lisa Shidler at [email protected].