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Bob Parrish C PA. P.C.
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IRA - Required Distributions
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Telephone — Simply to Help —Helping You
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In Summary: Wednesday, March 21, 2001 PROPOSED CHANGES IN REQUIRED MINIMUM DISTRIBUTION RULES FOR QUALIFIED PLANS AND IRAs On January 11, 2001, the Internal Revenue Service ("IRS") issued proposed amendments to regulations covering required minimum distribution ("RMD") rules under Section 401(a) of the Internal Revenue Code ("IRC"). These proposed regulations simplify the way required minimum distributions are calculated. They also allow the IRA owner more flexibility in IRA planning and in choosing beneficiaries. The effective date for the new RMD rules is January 1, 2002. However, IRA owners may elect to use the new RMD calculation method for distributions required in 2001. The impact on IRA owners can be summarized as follows: 1. IRA Owners Turning 701/2 in 2000 - affects those who delayed their first distribution until 2001 (to be taken no later than April 1, 2001). Their first distribution must be calculated using the current distribution regulations in effect since 1987. It is important that these IRA owners notify the financial institution/custodian holding their IRA regarding their method of calculating this distribution. 2. IRA Owners 701/2 and Older - these individuals are already taking their required minimum distributions. They may elect to use the new RMD method for their 2001 distribution. In many cases, this will reduce their distribution amount. 3. IRA Owners Turning 701/2 in 2001 - they may elect to use the new RMD method to calculate their 2001 distribution amount. This brief explanation of how the proposed regulations could affect IRA distributions does not cover all of the changes that are included in the proposed regulations. An IRS public hearing is scheduled for June 1, 2001 and more detailed information should be available then. For now, it is important to note that any materials used to recommend IRA distribution options will have to be modified to reference the proposed regulations. What changes did the IRS make to the Required Minimum Distribution rules? Formerly, Required Minimum Distributions (RMDs) were calculated based on the age of the owner and beneficiary. Additionally, the IRA owner was obligated to make a number of decisions regarding their beneficiary designation and ongoing calculation methods upon attaining age 70.5 .The IRS has decided to greatly simplify these rules: •Under the new rules an individual ’s life expectancy is generally determined by a single table, which assumes the beneficiary is exactly 10 years younger than the IRA owner. The only exception to this rule occurs when a spouse, named as primary beneficiary, is more than 10 years younger than the IRA owner, in this case the actual joint life expectancy would apply. •A beneficiary may be changed, even after the IRA owner ’s death, without any negative effect on the required distribution calculation.How exactly will these new rules work? If for example Matt has attained age 70.5 and has named his wife Patrice, age 64,his beneficiary the life expectancy used to calculate Matt ’s distribution would be the combined life expectancy of a 70 year old and a 60 year old, which is 26.2.The minimum distribution would be calculated by dividing Matt ’s IRA balance at the end of the previous year by 26.2.If Matt had instead chosen his son, Jeff, age 45,as his beneficiary the life expectancy figure would still be 26.2.Regardless of who is chosen as the beneficiary, Matt ’s life expectancy for calculating his RMD will be that of himself and a beneficiary exactly ten years younger than he is. The only exception to this life expectancy would be if Patrice were more than 10 years younger than Matt. In that case, their combined life expectancy would be derived from the IRS ’s Joint Life and Last Survivor Expectancy Tables. For instance, if Matt were 70.5 and his spouse beneficiary, Patrice, was only 50,their joint life expectancy would be 34 years rather than the 26.2.When are these changes effective? The effective date for these changes is January 1,2002.However,the IRS will allow IRA owners to use these newly simplified rules in 2001 if they choose to do so. Do these rules apply to owners already receiving required minimum distributions? Yes, IRA owners over 70.5 who are currently deceiving distributions are eligible to use the revised calculation methods, beginning with distributions for year 2001.What options do IRA beneficiaries have when receiving distribution after the death of the IRA owner? A spouse beneficiary will have the option of rolling the IRA into their own name and treating it as their own, as well as taking annual distributions based on their life expectancy. Generally, a non-spouse beneficiary also will have the option of receiving distributions over their life expectancy, or more rapidly, as long as the "Beneficiary IRA's established by 12/31 of the year following the IRA owner ’s death and the first annual distribution is also received by that date. Do the new rules limit the usefulness of the "Stretch RA"? Actually, these revised rules make the "Stretch IRA" distribution strategy even more attractive. Formerly, clients who had already begun receiving RMDs were unable to change their beneficiary designations as their situation changed. The revised regulations allow for changing the beneficiary designation as circumstances warrant. Additionally, these rules clarify the ability of a beneficiary to receive distributions over their life expectancy after the death of the IRA owner. How could my beneficiary change after I die? The most common scenario in which a beneficiary designation would be altered after the death of the IRA owner is if the primary beneficiary were to "disclaim" all or part of the IRA. This selection offers the primary beneficiary the option of having the assets pass directly to the secondary beneficiary if for financial planning purposes it is decided this would be a better choice. What type of accounts do these new rules apply to? These new rules apply not only to IRAs but also to Qualified Retirement Plans (401(k),Profit Sharing, etc.),and Internal Revenue Code section 403(a),403(b)and 457 plans.
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