TAX AND ESTATE LAW BULLETIN
NEW MINIMUM DISTRIBUTION RULES FOR IRA'S AND QUALIFIED RETIREMENT PLANS
I. INTRODUCTION
Calculating the minimum required distributions that an IRA account owner or a qualified retirement plan participant must take was unnecessarily complex under old rules issued in 1987. The IRS finally simplified the process under new proposed regulations issued by the Treasury on January 11, 2001. This memorandum addresses some of the key provisions of these new regulations and other applicable rules. For simplicity, this memorandum will refer to all IRAs and qualified retirement plans covered by the regulations as "retirement plans" and to all IRA account owners and qualified retirement plan participants as "account owners".
II. BACKGROUND AND GENERAL INFORMATION
Account owners must begin taking minimum required distributions from their retirement plans by April 1 following the year in which they attain age 70 ½. This is known as the required beginning date ("RBD"). The only exception is for account owners who are still working and do not own more than five percent of the sponsoring employer, in which case the RBD is the later of April 1 following the year in which they attain age 70 1/2 or the calendar year in which the account owner retires. An account owner may, without penalty, withdraw funds from the retirement plan before his or her RBD (but after attaining age 59½) and may withdraw more than the required distribution whether before or after the RBD. The RBD marks the date at which the account owner must begin taking minimum distributions.
If an account owner does not need the funds in the retirement plan, financial advisors generally recommend that only the minimum required distribution be withdrawn so that the retirement account assets can continue to accumulate on a tax-deferred basis as long as possible. For most account owners, the new regulations will reduce the distribution that must be taken and, thus, increase the potential for tax-deferred growth in the retirement plan. The new regulations also substantially expand the account owner's options in naming a beneficiary of the remaining balance in the account upon the account owner's death and grant greater flexibility about when that beneficiary designation may be made.
III. CALCULATION OF THE MINIMUM REQUIRED DISTRIBUTION
The new rules provide a simplified method for calculating an account owner's minimum required distribution. A uniform table of life expectancies applies to almost all account owners, regardless of who they name as the actual beneficiary. The uniform table sets forth the joint life expectancies of the account owner and a hypothetical person deemed to be 10 years younger than the account owner. Under the uniform table, the account owner obtains his or her divisor, which varies depending upon the account owner's age, and divides the December 31 account balance by that divisor. The resulting number equals the required distribution for the following year.
The only exception is for account owners whose spouse is more than 10 years younger than the account owner. In that circumstance, the actual life joint life expectancies of the account owner and his or her spouse may be used to calculate the minimum required distribution.
Under the prior rules, the amounts required to be withdrawn were based not only upon the account owner's life expectancy, but also upon the life expectancy of the person named as the "designated beneficiary" and whether or not the account owner elected to recalculate his own and/or his beneficiary's life expectancy. That scheme resulted in nine possible ways to complete the division depending upon who the designated beneficiary was and whether the account owner elected recalculation. Further, both the designated beneficiary and the election regarding the recalculation of life expectancies had to be made no later than the account owner's RBD. After the RBD, the account owner could not change the designated beneficiary if the effect of the change would be to lengthen the payout period (thereby decreasing the minimum required distribution).
Now, with the new rules, the account owner can change his or her designated beneficiary whenever he or she wishes without affecting the his or her minimum required distribution. Also, happily, the account owner no longer needs to analyze whether or not to recalculate life expectancies.
IV. AFTER THE DEATH OF THE ACCOUNT OWNER
The designated beneficiary of the account owner may be finally determined as late as December 31 of the year after the account owner's death. Thus, the RBD is significant under the new rules only as the date the account owner must begin withdrawing minimum required distributions. Determination of the designated beneficiary by the RBD is no longer necessary.
If the beneficiary is the account owner's surviving spouse, the surviving spouse may roll over the retirement account into his or her own retirement account and name his or her own beneficiary. If the surviving spouse chooses not to roll over the retirement account, the surviving spouse must begin taking distributions, on a schedule based on the surviving spouse's life expectancy, upon the later of December 31 of the year after the account owner dies or December 31 of the year after the account owner would have reached age 70½.
Any beneficiary who is not the surviving spouse must begin taking distributions no later than December 31 of the year following the account owner's death. The beneficiary's minimum required distributions, if he chooses not to take a lump sum, are determined based upon his or her own life expectancy.
V. PLANNING IMPLICATIONS
Account owners no longer are confronted with multiple options for calculating minimum required distributions. The uniform table simplifies that calculation, and also eliminates the owner's need to make difficult decisions about the recalculation of his own or his beneficiary's life expectancy. Also, the RBD no longer represents the point in time at which the designated beneficiary must be irrevocably named. The RBD is now only what its name suggests - the date at which the account owner must begin taking minimum required distributions.
Where there are multiple beneficiaries of a retirement account, such as the children of the account owner, the retirement account can be divided into separate accounts and the beneficiaries can separately apply the minimum required distribution rules. Also, account owners can now name charities as beneficiaries of their retirement accounts without adversely affecting calculation of the account owner's minimum required distributions. Naming a trust as beneficiary should be less cumbersome under the new rules since the account owner or his or her executor have until December 31 following the year of death to satisfy the documentation requirements relating to trusts as beneficiaries. Finally, the new rules, by postponing the determination of the identity of the designated beneficiaries until the year following the account owner's death, allow each named beneficiary to take action appropriate to his own situation, e.g., receive a lump sum, take distributions over his life expectancy, or disclaim so that a contingent beneficiary becomes the recipient.
VI. SUMMARY AND EFFECTIVE DATE
The new proposed regulations represent a substantial improvement over the prior rules that were often quite confusing. Nevertheless, planning with retirement accounts can still be quite complex and clients are advised to seek professional assistance with all aspects of their retirement accounts.
The new rules are effective for all minimum required distributions in 2002, but may be elected to be used by account owners for 2001 distributions.
NOVEMBER, 2001 www.langesimpson.com VOLUME 1 ISSUE 1
