NEW IRA DISTRIBUTION RULES - - HOORAY!
By Vicki L. Anderson
With surprising self-initiative favoring the taxpayer, the IRS issued new proposed
minimum distribution regulations on January 11, 2001.1 These regulations completely
restate and replace the convoluted and confusing 1987 proposed regulations that we
have painfully endured for 14 years. For 2001, IRA owners may use the new rules (or
they may stick with the old rules) without waiting for their IRA custodian to amend IRA
agreements. However, qualified plan participants, those with 401(k)’s or 403(b)’s, for
example, cannot use the new rules until their plans are amended. The new regulations
are expected to become final on or after January 1, 2002.
Here is the good news about the new rules:

The necessity of designating a proper beneficiary and irrevocably electing
a method of distribution at age 70 1/2 is eliminated. A simple, uniform
table now controls the calculation of lifetime minimum required
distributions from IRA’s and qualified plans, no matter who is designated
as beneficiary. The uniform table cuts the payout most participants must
take, thereby lowering the tax bracket and leaving more money to
accumulate tax deferred.

At death, distributions generally will be paid out over the life
expectancy of the person who inherits the IRA\qualified plan. The old
rules often forced the inheritance out within 1 year or 5 years after death,
greatly accelerating taxes.

The identity of the beneficiary is not finalized until the end of the
year following the year of the participant’s death. This extended period
permits post-death planning opportunities, such as the use of disclaimers
to create new beneficiaries.
1
The new proposed regulations are numbered 1.401(a)(9)-0 through 1.401(a)(9)-8; 1.403(b)-2; 1.408-8 and 54.4974-2.
1
I. UNIFORM TABLE FOR LIFETIME DISTRIBUTIONS
The greatest boon to retirement plan holders under the new rules is the all new
and streamlined way to calculate minimum required distributions once the participant
hits his or her required beginning date (“RBD”). The RBD remains April 1 following the
year the participant reaches age 70 1/2.2 And, as before, the participant must begin
taking distributions at the RBD or face a 50% penalty.
2
Prop. Reg. §1.401(a)(9)-2, A-2.
2
We determine the distribution by dividing the account balance (as of December 31
of the prior year) by a life expectancy factor.3 Under the old rules, this factor varied
depending on (i) whether the participant had named a designated beneficiary as of the RBD;
(ii) the age of the beneficiary; and, (iii) whether the participant had irrevocably elected to
recalculate expectancies, use the fixed term method or somehow combine methods.
Participants often failed to make the time-sensitive elections, causing plan default provisions
to kick in - - possibly to the disadvantage of the participant and beneficiaries.
Now, no decisions must be made at the RBD, and calculating the lifetime minimum
distributions becomes a piece of cake with the new Uniform Table.4
UNIFORM TABLE
Age
3
4
Factor
Age
Factor
Age
Factor
Age
Factor
70
26.2
82
16.0
94
8.3
106
3.8
71
25.3
83
15.3
95
7.8
107
3.6
72
24.4
84
14.5
96
7.3
108
3.3
73
23.5
85
13.8
97
6.9
109
3.1
74
22.7
86
13.1
98
6.5
110
2.8
75
21.8
87
12.4
99
6.1
111
2.6
76
20.9
88
11.8
100
5.7
112
2.4
77
20.1
89
11.1
101
5.3
113
2.2
78
19.2
90
10.5
102
5.0
114
2.0
79
18.4
91
103
4.7
115+
1.8
9.9
Prop. Reg. §1.401(a)(9)-5, A-1.
Prop. Reg. §1.401(a)(9)-5, A-4; The uniform distribution period table is the required minimum distribution incidental benefits
(MDIB) divisor table originally prescribed in §1.401(a)(9)-2 of the 1987 proposed regulations.
3
80
17.6
92
9.4
104
4.4
81
16.8
93
8.8
105
4.1
A participant simply divides the factor from the table into the prior year-end
account balance to determine the minimum required distribution for the year.5 So, if
Joe is 83 years old this year and his IRA has $500,000 as of last December 31, his
minimum required distribution for 2001 is $500,000 ÷ 15.3 or $32,680. It no longer
matters who Joe selected as a beneficiary, or even if he failed to designate a
beneficiary. Joe no longer must determine whether or not to recalculate his life
expectancy or that of his wife.
This new approach has tremendous advantages over the old method for
determining distributions:
•
The participant must do nothing special at age 70 1/2 except begin
taking distributions. Before, the participant had to irrevocably elect one of
several distribution methods and designate just the right beneficiary.
•
The Uniform Table begins with a 26.2 year divisor, which is the
divisor applied under the old rules for joint lives if the designated
beneficiary was 10 or more years younger. So, there is built in deferral - first, by assuming there is a designated beneficiary (when there may not
be) and second, by artificially treating that beneficiary as younger, even
when not.
•
The Uniform Table utilizes the recalculation method rather than the
fixed method. This permits the slowest distribution rate and assures that
the plan will last at least the life of the participant. Even at age 114, the
required distribution is only 50% of the account. If the Uniform Table had
employed the fixed term method for joint lives, the account would be
depleted when the participant reached age 96.
•
The drawback of naming a charity, the estate or a non-qualified
trust as a beneficiary is eliminated for life-time distribution purposes.
Under the old rules, selecting such a beneficiary forced out distributions
only over the participant’s life. No joint life calculation could be used.
5
Prop. Reg. §1.401(a)(9)-5, A-1.
4
The Uniform Table and simple calculation method apply in nearly every situation.
The only exception is if the participant is married to someone more than 10 years
younger. If so, the participant may use the real joint life expectancies recalculated
annually, rather than the Uniform Table, permitting the participant to take advantage of
the younger spouse to stretch out distributions even longer.6
II.
DETERMINING POST-DEATH DISTRIBUTIONS
Under the new rules, required distributions to beneficiaries will be based on the
life expectancies of those beneficiaries.7 This is a significant change. Under the
old rules, beneficiaries often were stuck with the distribution schedule and life
expectancies selected at the participant’s RBD. Let’s say that at age 70 1/2, Joe
selected his wife as his designated beneficiary and elected to recalculate both lives for
purposes of the life-time distributions. Joe’s wife died a few years later, and Joe then
named his daughter as beneficiary. Unfortunately, at Joe’s later death, the daughter
was stuck with the consequences of Joe’s age 70 1/2 irrevocable election, and the
taxable benefits were forced out to the daughter the next year, in total, with crushing tax
results. The new rules eliminate such harsh treatment. Payments now are extended
over the daughter’s life expectancy.
Moreover, because the actual beneficiary of a plan is not determined until the last
day of the calendar year following the year of death, the participant’s beneficiaries are
not carved in stone at death or at age 70 1/2 as they were under the old rules.8
Opportunity exists for the use of disclaimers and other post-death planning. For
example, a child who would inherit an IRA may disclaim, allowing a younger generation
to inherit. The payments then would be stretched out over the longer lives of those
6
7
8
Prop. Reg. §1.401(a)(9)-5, A-4(b).
Prop. Reg. §1.401(a)(9)-3; Prop. Reg. §1.401(a)(9)-5; A-5.
Prop. Reg. §1.401(a)(9)-4, A-4.
5
grandchildren.
A. Computing distributions - - death before RBD
Under the new rules, if a participant dies before age 70 1/2, the beneficiary
(finally determined on December 31 of the year following the year of the participant’s
death) receives distributions, as follows:
Spouse - If the beneficiary is the participant’s spouse, the spouse
1.
can:
a)
Rollover the benefits into her own IRA - This
choice is and will remain the most common as it allows the greatest
tax deferral opportunities and control by the spouse.9
a)
Take distributions over 5 years - The 5-year rule
generally applies where the participant dies before age 70 1/2. A
beneficiary always has the choice of taking distributions over only 5
years.10
a)
Receive distributions over her life expectancy,
recalculated annually - If the Spouse chooses this option, she
must begin receiving the distributions no later than December 31 of
the year the deceased spouse would have reached 70 1/2 or
December 31 of the year after the participant died. The IRS was
particularly generous with a surviving spouse, by allowing these life
expectancy distributions to be recalculated annually rather than
fixed.11
1.
Individual Beneficiary - If the beneficiary is a non-spouse
individual such as a child, the child (or a qualifying trust for the child) can:
a)
a)
Take distributions under the 5-year rule.12
Receive distributions over the child’s fixed life
expectancy - (beginning no later than December 31 of the year
9
I.R.C. §402(c)(a).
10
Prop. Reg. §1.401(a)(9)-3, A-1.
11
Prop. Reg. §1.401(a)(9)-3, A-3(b).
12
Prop. Reg. §l.401(a)(9)-3, A-1.
6
following the year of the participant’s death). The child’s life
expectancy is not recalculated, as a spouse’s life is.13
13
Prop. Reg. §1.401(a)(9)-3, A-3(a).
7
1.
Multiple Beneficiaries - Multiple beneficiaries who are individuals
(including qualifying trusts for individuals) must:
Take distributions under the 5-year rule.14
a)
a)
1.
Receive distributions over the fixed life expectancy of
the oldest of the group - If the IRA were divided into separate
accounts for each beneficiary, each beneficiary’s life expectancy
could be used for the separate accounts.15
Non-Individual Beneficiary - If a beneficiary is a non-individual
(charity, estate, corporation), all death distributions are made under the
5-year rule.16
B.
Computing Distributions - - Death After RBD
If the participant dies on or after his RBD, the new rules require that in the year of
death, the minimum required distribution must be paid from the participant’s account,
still using the Uniform Table.17 After the year of death, distributions are paid to
beneficiaries, as follows:
1.
Surviving Spouse - If the beneficiary is the participant’s surviving
spouse, the spouse can:
14
Prop. Reg. §1.401(a)(9)-3, A-1.
15
Prop. Reg. §1.401(a)(9)-5, A-7; Prop. Reg. §1.401(a)(9)-8, A-3.
16
Prop. Reg. §1.401(a)(9)-3, A-2; Prop. Reg. §1.401(a)(9)-4, A-3(b).
17
Prop. Reg. §1.401(a)(9)-5, A-4(a)(1).
8
Rollover the benefits into her own IRA.18
a)
a)
Receive distributions over her life expectancy,
recalculated annually - If the spouse dies before the benefits are
all paid, any benefits remaining will be paid out over the remaining
(fixed) life expectancy of the surviving spouse, computed as of the
age of her birthday in the year of her death.19
1.
Individual Beneficiary - If the beneficiary is a non-spouse
individual, the beneficiary must take the benefits over the beneficiary’s
fixed life expectancy.20
1.
Multiple Beneficiaries - If there are multiple beneficiaries and they
are all individuals, they must take the required distributions over the oldest
beneficiary’s fixed life expectancy (unless separate accounts are
created).21
1.
Non-Individual Beneficiaries - If a beneficiary is a non-individual,
the participant is treated as having “no designated beneficiary.” In this
case, the applicable distribution period is the remaining years of the
participant’s life expectancy, determined using the IRS’ single (fixed) life
expectancy table.22
18
I.R.C. §402(c)(a).
19
Prop. Reg. §1.401(a)(9)-5,A-5(b)(c)(2).
20
Prop. Reg. §1.401(a)(9)-5, A-5(b)(c)(1).
21
Prop. Reg. §1.401(a)(9)-5, A-7(a).
22
Prop. Reg. §1.401(a)(9)-4, A-3(b); Prop. Reg. §1.401(a)(9)-5, A-5(c)(3).
9
Endnotes
10