IRS Simplifies IRA Distribution Rules

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Title:
IRS Simplifies IRA Distribution Rules
Date:
March 1, 2001
Area(s) of Practice:
Tax Law

On January 11, 2001, the Treasury Department released proposed regulations which significantly simplify the manner in which IRA participants and their beneficiaries calculate their minimum required distributions from IRAs. In general, a participant must begin taking distributions no later than April 1 of the calendar year following the calendar year in which he or she attains age 70½ (the "required beginning date"). The amount of each year's "minimum" distribution is calculated by dividing the participant's account balance at the end of the immediately preceding year by an "applicable divisor." Failure to comply with these rules still results in a 50% excise tax (as was the case with the prior rules) on any amounts that should have been withdrawn but were not.

Lifetime Distributions

Under the new proposed regulations, the IRA participant's applicable divisor will now generally be determined using a "Uniform Table." The divisor under the Uniform Table assumes that the participant would calculate distributions based on the joint life expectancy of the participant and an individual ten years younger (i.e., if the participant is age 75, the beneficiary is deemed to be age 65, even if the beneficiary is older, younger or is not even designated). The participant would refer to the Uniform Table each year. Any participants who have already started taking their minimum required distributions or who must start to take their distributions in 2001, should review the new rules before taking any distributions for the year 2001. Note that participants who have already begun taking their minimum distribution may switch to this method in 2001. In most cases, it will be beneficial for them to do so.

  • Spousal Exception. If the participant's sole beneficiary is a spouse who is more than 10 years younger, the IRS will allow the joint life expectancy to be calculated using the actual age of the younger spouse.

Beneficiary Designation

The proposed regulations also provide for increased flexibility in designating beneficiaries. Under the proposed regulations, the "designated beneficiary" will be determined as of December 31 of the calendar year following the year of the participant's death (rather than the participant's required beginning date). This does not, however, mean that new beneficiaries can be named after the participant's death. It will still be important to name a beneficiary or beneficiaries prior to death. Nevertheless, the new rules permit the designation of beneficiaries after the required beginning date for distributions, and participants may now change their designated beneficiaries from time to time to reflect any changes in circumstances or to fit their current estate planning objectives.

Participants who have named trusts as beneficiaries or partial beneficiaries of IRAs may now be able to simplify their beneficiary designations. If we have prepared such a beneficiary designation for you, we would be happy to review it to determine if any modifications are advisable.

  • The IRS specifies in the regulations that an estate may not be a "designated beneficiary." Because of increased flexibility under the rules, however, it may be permissible to transfer the IRA out of the estate to the individual beneficiaries of an estate before December 31 of the year after the year of the participant's death so that the individual beneficiaries can be the "designated beneficiaries."

Post-Mortem Distributions

In general, a beneficiary will be permitted to take distributions based on his or her own life expectancy in the year after the year of the participant's death (regardless of whether or not the participant had reached age 70½ by his or her death). For example, if the participant dies and the designated beneficiary has his or her 55th birthday in the calendar year after the year of the participant's death, the beneficiary may take distributions over 28.6 years (i.e., the "applicable divisor" will be 28.6 in the first year and reduced by one for each year thereafter). In the event the beneficiary does not survive this life expectancy term, the successors (i.e., the initial beneficiary's beneficiaries) to the IRA will continue to receive distributions over the remainder of the deceased beneficiary's term. All beneficiaries should examine the new rules (with the assistance of an attorney or other tax advisor, if necessary) before taking any distributions in 2001. Note that most beneficiaries who were previously required to take distributions under accelerated methods will now be able to switch to this more favorable method.

  • Similar to the old rules, if a trust with multiple beneficiaries is designated the beneficiary of an IRA, the life expectancy of the oldest beneficiary of the trust will be used.
  • If the beneficiary is not an individual (or a trust with only individual benficiaries) or if there are multiple beneficiaries, and any of them is not an individual (i.e., a charity), then the IRS will treat the participant as not having a designated beneficiary and distributions will be made by using the remaining years of the participant's life expectancy, based on the participant's age on his or her birthday in the year of the participant's death, and reduced by one year for each year thereafter (assuming the participant died after age 70½). If the participant died before age 70½, the IRA would have to be distributed no later than December 31 of the year containing the fifth anniversary of the participant's death.

Reliance on Regulations

The IRS has announced that taxpayers may rely on these new regulations, notwithstanding a Bush administration moratorium on certain regulations issued at the end of the Clinton administration.