Most retirees know by now that in the Worker, Retiree, and Employer Recovery Act of 2008, Congress waived required minimum distributions in 2009 from IRAs, 401(k) accounts, and certain other retirement plans. The intended benefit was to prevent retirees from being forced to sell invested assets during a severe market decline.
When the law was first passed, an account owner who had already received an RMD was allowed 60 days after receiving the money to put it back into the retirement account. The IRA has now extended that deadline until the later of November 30, 2009 or 60 days from the time you withdraw the money. This is good news for retirees to be sure.
1. You are allowed to return only one IRA withdrawal back into the account within a 365 day period. This means that if you received regular distributions every month, you can return only one of those withdrawals. However, if you received the RMD in a lump sum, you can put it all back into the account.
2. If any taxes were withheld from your RMD, that money needs to be returned also. If it is not, the amount withheld for taxes will be considered a distribution and will be taxed as ordinary income.
3. Since you didn’t have to take an RMD in 2009, that leaves more IRA money available for possible conversion to a Roth IRA. Although you will pay taxes when you make the switch, you can take tax-free withdrawals after five years. The Roth conversion also means no more required minimum distributions and a potential a tax-free inheritance for your heirs. If you want to make the conversion in 2009, your adjusted gross income just needs to be below $100,000. That income limit is removed in 2010.
4. If you notified your IRA or 401(k) account service to stop RMD withdrawals in 2009, be sure to restart them in 2010 to avoid being penalized.
For more information on the RMD payback extension, you can read IRS Notice 2009-82.