If you are an IRA owner or participant in a retirement plan, did you know that the federal government requires that certain amounts be distributed to you (and your beneficiaries) from those accounts when you reach a certain age? The Internal Revenue Service recently issued new proposed regulations governing minimum required distributions (MRDs) from retirement plans and IRA accounts. The new regulations greatly simplify the rules governing these distributions. They will generally result in smaller minimum required distributions and provide greater retirement and estate planning flexibility for most individuals.
Under the old rules, the calculation of the minimum required distributions to a participant who had reached his or her required beginning date (generally, April 1st of the year following the year in which the participant attains age 70-1/2) included a number of considerations, including the age of any “designated beneficiaries.” It also hinged on whether the participant elected to annually redetermine the life expectancy of the participant, the designated beneficiary or both. (Even under the new rules, the definition of a “designated beneficiary” still includes only individuals and certain trusts.)
By contrast, the new rules generally rely on the use of a single uniform life expectancy table to determine the participant’s MRD each year. The sole exception is for participants whose designated beneficiary is a spouse more than 10 years younger than the participant. In that event, the actual joint life expectancy of the participant and his or her spouse under the old rules may be used to determine the MRD. The uniform table generally results in lower MRDs than under the old rules since it is based on the joint life expectancy (recalculated annually) of the participant and a designated beneficiary (whether or not one is actually named) that is 10 years younger than the participant. The uniform table is optional for 2001 and becomes mandatory in 2002. If you are subject to the MRD rules and have not yet taken your minimum required distribution for 2001, you may wish to see if the new rules are advantageous given your particular circumstances as explained below.
Because lifetime distributions under the new rules are made solely on the basis of the uniform table (except for the younger spouse exception noted above), participants now enjoy greater flexibility in choosing a beneficiary other than an individual, such as a charity. Also, under the new rules, after the required beginning date, a switch of the designated beneficiary to someone with a shorter life expectancy will no longer result in a change in the participant’s MRD. Nevertheless, it is still important that participants review their beneficiary designation periodically to ensure that it clearly reflects their current estate planning goals and that it also takes advantage of the simplified distribution rules applicable after his or her death.
The new rules also simplify the calculation of MRDs to beneficiaries after a participant’s death. If the participant named a surviving spouse as the beneficiary, that spouse is still generally permitted to make a special rollover of the balance of the participant’s account into an IRA established in his or her own name. The balance of the rollover IRA can be distributed over the surviving spouse’s life expectancy using the uniform table and the surviving spouse can also name new designated beneficiaries of the rollover account. By doing so, the rollover IRA can be distributed over a much longer period than if the funds continue to be held in the participant’s original account.
For non-spousal beneficiaries, the new rules generally require that the balance of the decedent’s IRA account be distributed over the beneficiary’s life expectancy (determined as of the date of the participant’s death). This can result in a greatly extended payout period if the designated beneficiary is much younger than the account owner. If the participant did not designate a beneficiary, and if the participant had not reached the required beginning date, the entire balance of the account must be distributed within five (5) years of the participant’s death. If the participant had reached the required beginning date, then the balance of the account is generally distributable over the remaining life expectancy of the participant. Thus, all participants should name at least one designated beneficiary prior to his or her death in order to further extend the MRD period beyond his or her own life expectancy.
Though the new rules are generally effective only for MRDs occurring in 2002 and thereafter, the IRS will permit the new rules to be applied beginning with MRDs for the 2001 calendar year. Therefore, if the participant is already receiving MRDs from his or her retirement account, the amount of such MRD for 2001 should be determined under both the new rules and the old rules. If the new rules result in a smaller MRD amount that is consistent with the participant’s current needs and estate planning goals, then the participant should notify in writing the plan administrator or IRA custodian that he or she wishes to apply the new rules for the MRD to be made from his or her account for 2001. (Qualified retirement plans, but not IRAs, must be amended by the plan sponsor before participants can take advantage of the revised MRD rules in 2001.)
Despite the simplicity of the new rules, the need for planning remains. Participants and IRA account owners should still consult with their plan administrators, IRA custodians, or other estate and financial planning advisors, to fully discuss their options and ensure the best possible outcome for minimum required distributions during life and after death.