IRS Issues New Retirement Plan Distribution Proposed Regulations
© 2001, Barry C. Picker, CPA/PFS, CFP
www.BPickerCPA.com
Barry@BPickerCPA.com

While these regulations are officially in PROPOSED form, they are, for the time being, the rules that are in force. (The prior rules have been in PROPOSED form for over 13 years.) Should any part of the final regulations be more restrictive than any rule in the proposed regulations, the final regulation will not be applied retroactively.

The following are the major points of the new rules--

–There is now one uniform table that just about every individual will use to compute their lifetime minimum required distributions. Under no circumstances will anyone’s lifetime minimum required distribution be higher than that computed under this table.

–The only individuals not using the uniform table will be those individuals who have named their spouse as their sole beneficiary, and then only IF their spouse is more than ten years younger than them. These individuals will compute each year’s distribution by use of the joint and survivor tables, using the ages of the account holder and spouse on their birthday in each distribution year. They will have minimum required distributions that are less than those computed under the uniform table.

–The uniform table and the table used when the sole beneficiary is a spouse more than ten year younger use recalculated life expectancies. This means that account holders who take only the annual minimum required distribution will never empty their retirement account during their lifetime, unless investment results decrease the value of the account to the point that the account value is less than the MRD that has to be withdrawn for the year.

–Since, except for those married individuals mentioned above, the identity of the beneficiary is of no consequence, one need not name their beneficiary by their required beginning date. However by no means does this mean that you should not name a beneficiary.

–When the spouse is the sole beneficiary of a retirement account and elects to remain as the beneficiary after the account holder’s death, the minimum required distribution is computed in such a way that the spouse will also never empty the retirement account during their lifetime, unless investment results decrease the value of the account to the point that the account value is less than the MRD that has to be withdrawn for the year.

–Individuals will be permitted to change their beneficiary at any time, including after the required beginning date, and that change will not cause the required minimum distribution to increase or decrease, except where the beneficiary change is either to or from a spouse more than ten years younger than the account holder.

–Similarly, individuals with multiple IRA accounts will be permitted to move funds from account to account at any time, with no consequence.

–There is no longer any such thing as electing "term certain", "recalculation" or "hybrid" to calculate the annual minimum required distribution. This is one less thing to worry about.

–Since there is no concept of having "single-life recalculation", there is no longer any possibility of having to pay out the entire retirement plan balance in the year after the year of the account holder’s death, unless the decedent died at age 103 or older, and did not have a designated beneficiary in place.

–Post death minimum required distributions will be based upon the life expectancy of the account’s oldest designated beneficiary. It may be possible, however, to split the account into each beneficiary’s share after death. Then each beneficiary can base post death minimum required distributions on his or her own life expectancy.

–If the account’s sole beneficiary is the spouse, the life expectancy will be recalculated annually as long as the spouse is alive. After the spouse’s death, and for all other beneficiaries, life expectancy is decreased by one each subsequent year.

–The identity of the designated beneficiary is of no consequence until the death of the account holder. The key date used to identify the designated beneficiary is the last day of the year following the year of the account holder’s death.

–Any beneficiary who either disclaims their interest, or whose share is paid to them, so that they no longer have a beneficial interest in the account as of the end of the year after the year of death, is ignored. This will lead to many planning opportunities.

–Spouse-beneficiaries are still permitted to rollover the deceased’s account into their own IRA.

–The five year payout rule applicable when the account holder dies before the required beginning date is no longer the default. Rather, the default is to pay out the account over the life expectancy of the oldest designated beneficiary. The five year rule will only be applicable if elected, or if there is no designated beneficiary as of the end of the year following the year of the account holder’s death.

–When the account holder dies after the required beginning date, and there is no designated beneficiary as of the end of the year after the year of the account holder’s death, the post-death minimum required distribution is computed based upon the remaining life expectancy of the account holder.

–IRA Custodians must now notify the account holder AND THE IRS of the minimum required distribution. This is a key point. Big Brother now has the tool to make sure that you are complying with the law. The penalty for failure to comply is 50% of the amount that should have been withdrawn, and was not.

These rules are applicable right now, and covers all calendar year 2001 minimum required distributions, even if the account has already been in payout status. Many people, for example, my mother, will find their required distribution cut almost in half. For qualified plans, the plans actually need to be amended to reflect these changes.

These rules also apply to beneficiaries of account holders who died in year 2000. They do not apply to beneficiaries of account holders who died prior to year 2000. They also do not apply to people who reached their required beginning date in 2000 and have not yet taken their first minimum required distribution which must be taken by April 1, 2001. However the rules will apply to their year 2001 minimum required distribution which has to be taken by December 31, 2001.

For IRAs however, these rules are effective for 2001 even if the IRA custodial agreement is not amended. It’s possible that many custodians will not be up to speed on these rules for some time, and will compute minimum required distributions based upon the old rules (which you can still choose to do but why would you want to???). They apparently have no right to insist on the old rule calculation, and you have every right to insist on the new rule calculation.

The beauty of these rules is that it will, for most people, slow down the distribution schedule (it will never speed it up) resulting in more money staying the plan and growing tax deferred.

While many aspects of retirement distribution planning have been simplified, and the required beginning date is no longer a date beyond which choices cannot be made, retirement distribution planning is still an important part of one’s financial planning. Errors can now be corrected after the required beginning date, and in some cases even after death. But now beneficiary designation forms will become even more important. As long as the retirement plan is a major part of one’s finances, it cannot be ignored. Plan accordingly.

The following is the new uniform distribution table, which is based upon the age of the account holder on his or her birthday in the year of the distribution--

          Applicable
Age       Divisor
------    -----------

70           26.2
71           25.3
72           24.4
73           23.5
74           22.7
75           21.8
76           20.9
77           20.1
78           19.2
79           18.4
80           17.6
81           16.8
82           16.0
83           15.3
84           14.5
85           13.8
86           13.1
87           12.4
88           11.8
89           11.1
90           10.5
91            9.9
92            9.4
93            8.8
94            8.3
95            7.8
96            7.3
97            6.9
98            6.5
99            6.1
100           5.7
101           5.3
102           5.0
103           4.7
104           4.4
105           4.1
106           3.8
107           3.6
108           3.3
109           3.1
110           2.8
111           2.6
112           2.4
113           2.2
114           2.0
115 and older 1.8