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IRS updates guidance on plan distributions

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in Small Business Tax,Small Business Tax Deduction Strategies

A 2008 tax law temporarily suspended the rule for required minimum distributions (RMDs) from qualified plans and IRAs for the 2009 tax year, but confusion still exists.

To provide assistance to taxpayers, the IRS recently updated the FAQs on its web site. The updated web site notes that certain distributions from 401(k) and other qualified plans made in 2009 for administrative convenience are not treated as RMDs.  

Strategy: Roll over such distributions to an IRA within 60 days. This eliminates the related 2009 tax liability that would otherwise be due.

If you arrange a direct trustee-to-trustee transfer of funds, no income tax will be withheld from the distribution. Otherwise, plan administrators will automatically withhold 20% of the payout, even if you intend to complete a rollover within 60 days. You must wait until you file your tax return for 2009 to recover the amount withheld.

The IRS web site also reminds taxpayers that the rule for RMDs is suspended only for the 2009 tax year, not the 2008 tax year. If you turned age 70½ in 2008, you had to take your initial RMD by April 1, 2009. Failure to do so may result in a hefty 50% excise-tax penalty.

On the other hand, you don’t have to take an RMD by April 1, 2010, if you turn age 70½ in 2009. Instead, make your initial RMD for the 2010 tax year by Dec. 31, 2010.

If you need cash this year, you can withdraw as much as you want from your plans and IRAs, but you’ll be taxed on the portion representing deductible contributions and earnings.

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