Time's Running Out to Take Retirement Account Distributions

When portfolios got whacked during the market implosion in 2008, the federal government gave retirees some relief by suspending the rule that required those over age 70½ to take money out of retirement accounts, such as traditional IRAs and 401(k)s. The suspension was just for 2009, though, and now the forced withdrawals, known as required minimum distributions (RMDs), are back. Those who haven’t yet taken money out of their retirement accounts, or haven’t taken enough out to meet the RMD requirements, have until Dec. 31 to take the necessary payouts.

The amount that must be withdrawn depends on the how much is in the retirement accounts and the retiree’s life expectancy, which you can find in IRS Publication 590. Divide the total amount in your retirement accounts at year-end 2009 by the number of years of life expectancy and the result is the amount you must take out.

The penalty for not taking the RMD is no slap on the wrist. For every $1 you fall below the RMD, you’ll pay an excise tax of 50¢. If the assets in your retirement accounts at the end of 2009 add up to $300,000 and your life expectancy is 20 years, for example, your RMD this year is $15,000. Fail to take the cash out and you’ll Uncle Sam $7,500.

If your accounts are spread over several financial-services companies, you’ll have to add them all up to get the total. If you have all your IRAs with one financial institution, on the other hand, there’s a good chance that the bank, broker, or mutual-fund company will do the RMD calculation for you. One possible bright spot: If at the end of 2009 your retirement portfolio was still reeling from the effects of the market plunge, your RMD may be lower than it ordinarily would have been.

If you’ve inherited a retirement account, the rules get much more complex. Spouses who inherit IRAs are subject to different requirements than children, for example. IRS Publication 590 goes into the rules in full detail.