2008 Recovery Act: Required Minimum Distributions Suspended and Changes to Rollover Rules

On December 23, 2008, President Bush signed into law the Worker, Retiree, and Employer Recovery Act of 2008 (“2008 Recovery Act”). The 2008 Recovery Act is an attempt by Congress to ease financial burdens resulting from the current economic crisis. The most notable provisions affecting individuals involve distributions from retirement plans, rollovers from Roth retirement accounts, and direct rollovers to nonspouse beneficiaries.

Required Minimum Distributions Suspended for 2009

Ordinarily, owners of IRAs and other retirement accounts are required to begin taking minimum distributions no later than April 1 the year after reaching age 70 1/2 (or, in some cases, on or before April 1 following the year of retirement if later). The 2008 Recovery Act temporarily suspends this requirement and its 50% penalty. As a result, owners of these retirement accounts may choose to forego all or part of their required distribution for 2009. This will not only reduce taxable income for that year, but also avoid having to sell investments in a down market. The temporary suspension will also extend the 5-year distribution period for the benefit of an individual who dies in 2007 before the required beginning date from 2012 to 2013. The suspension only applies to distributions in 2009 and to tax-qualified plans such as 401(k) plans, 403(a) annuity contracts and 403(b) plans, 457 plans maintained by a governmental employer, and individual retirement accounts.

Rollovers from Roth 401(k) Accounts to Roth IRAs

The 2008 Recovery Act also modifies rules affecting rollovers from a Roth 401(k) account to a Roth IRA. Ordinarily, contributions to a Roth IRA before 2010 are subject to adjusted gross income limits. For example, a married couple with an adjusted 2008 gross income of $169,000 or more may not make a Roth IRA contribution. Under the 2008 Recovery Act, contribution limits are removed for 2009 as well and individuals may make a tax-free rollover from a “designated Roth account” to a Roth IRA without regard to any income limit. A designated Roth account is a separate account under a 401(k) plan or 403(b) plan to which designated contributions are made and separate accountings are maintained.

Nonspouse Beneficiary Rollovers from Retirement Plans

The last notable provision in the 2008 Recovery Act affecting individuals pertains to retirement plans which must offer a direct rollover option to nonspouse beneficiaries beginning in 2010. Previous to this change in the law, a plan was not required, but could choose to offer a direct rollover of a distribution to a nonspouse beneficiary.