The changes in the minimum distribution rules create many new opportunities for planners and their clients to use retirement plan money to create wealth through the generations.
The Internal Revenue Service, on Jan. 17, 2001, issued a new set of proposed regulations that lay out the rules for computing minimum required distributions (MRDs) from retirement plans. These new regulations replace the proposed regulations that had been in place since 1987.
The new regulations, which are applicable to all qualified plans as well as IRAs and Sec. 403(b) plans (and starting in 2002, to Sec. 457 plans as well), are designed to simplify the computation of the annual MRDs. But they also create many new opportunities for planners and their clients to use retirement plan money to create wealth through the generations.
Under the new regulations, taxpayers approaching age 70 1/2 no longer have to make irrevocable choices that will affect their lifetime retirement and the payout to their beneficiaries. Instead, just about every taxpayer will now compute his or her annual MRD by using the divisor to be found in the uniform distribution table. (See chart.)
The exception will be a taxpayer whose spouse is more than ten10 years younger, and is the sole beneficiary of theis retirement plan. These taxpayers will use the actual joint life expectancies of the husband and wife to compute their annual required distribution, which will be less than a required distribution computed under the uniform table.
Every MRD computed under the new regulations will be either less than, or equal to, the MRD computed under the old regulations. In no case will it be greater.
The new uniform distribution table is based upon the age of the account holder on his or her birthday in the year of the distribution (see table).
Since the divisor never goes below 1.8 while the account holder is alive, if the or she account holder takes only the MRD each year, and does not suffer significant investment losses, the account will never be depleted during the account holder’s lifetime of the account holder.
Smaller MRDs mean that retirement account balances will be larger, leaving more to pass on to the next generation at death. More people will now need life insurance to make sure that their beneficiaries do not have to prematurely liquidate the retirement account to pay any estate tax.
Post-death MRDs for beneficiaries are also slightly easier to compute under the new regulations. A designated beneficiary will now be able to compute the MRDs based upon his or her actuarial life expectancy in the year after the year of the account holders death. The divisor determined for the beneficiarys first distribution year will then be reduced by one in each subsequent year until the account is exhausted.
It is still important to have a beneficiary designation on file with the account custodian or administrator. If an account holder dies without a designated beneficiary, the post-death account payout will depend upon whether the account holder died before or after the age 70 1/2 required beginning date. If death was before, then the account will have to be emptied no later than December 31st of the year containing the fifth anniversary of the account holders death. If death was after the required beginning date, then the post-death MRDs will be based upon the actuarial life expectancy of the decedent at the time of his death.
Under the new rules, the identity of the designated beneficiary is not officially determined until December 31st of the year following the year of the account holders death. This gap period allows a beneficiary to be removed, either by paying that beneficiarys share to that beneficiary, or by the beneficiary disclaiming his benefits in a qualified disclaimer.
A qualified disclaimer only works if the original beneficiary designation form lists contingent beneficiaries. Otherwise, if there is no contingent beneficiary and the original beneficiary disclaims his share, there will be no designated beneficiary and the chance for an extended payout is lost.
As under the old regulations, spousal beneficiaries still get special rules. A spouse is the only beneficiary who is permitted to roll her share of the decedents account into her own IRA. When the spouse is the sole beneficiary and the decedent dies before reaching age 70 1/2, the spouse can choose to remain the beneficiary and postpone distributions until the year that the decedent would have turned age 70 1/2.
If the spouse does not roll over the IRA into her own name, her beneficiary distributions will be computed based upon her attained age in each distribution year. This will ensure that the surviving spouse will never empty the account as long as she takes only the MRD each year.
The new regulations are effective for 2001 lifetime MRDs and for post-death distributions for decedents who died in 2000 or later. For IRAs, the 2001 distribution is computed on the new rules even if the IRA document has not been amended to reflect the new rules.
For company plans, the plan has to be amended before the MRD can be computed under the new rules. However, if a company plan makes a distribution based upon the old rules, the account holder can take the difference between the amount received and the computed MRD under the new rule, and roll that into an IRA.
While these new proposed regulations represent a tremendous effort on the part of the Internal Revenue Service, there were scenarios that were not addressed. One major issue is the question of the identity of the designated beneficiary if the named beneficiary dies after the decedent but before the measuring date of December 31st of the year following the year of death.
A second issue is the computation of beneficiary distributions when the account holder died in 1999 or earlier. The answers to these questions will have to wait for the issuance of the final regulations.
The new regulations represent an opportunity for planners to sit down with clients to review their retirement plans and beneficiary designations. This should especially be done for clients past their age 70 1/2 required beginning date, since the new regulations allow changes to be made that could not be made previously.
The new regulations represent an opportunity for planners to sit down with clients to review their retirement plans and beneficiary designations. This should especially be done for clients past their age 70 required beginning date, since the new regulations allow changes to be made that could not be made previously.
Barry C. Picker, CPA/PFS, CFP, a nationally recognized expert, is the author of “”s Guide to Retirement Distribution Planning.” ” He cam be reached via Visit his web site at www.BPickerCPA.com. For speaking engagements and other comments, e-mail himl at Barry@BPickerCPA.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 13, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.