rmd_2001_brief

Background

Since 1987, the minimum amounts taxpayers must take from their qualified retirement plans and IRAs have been determined based on proposed regulations that the IRS never finalized. Those regulations have not been particularly popular because they’re complex and contain numerous traps for the unwary.

The basic rules say an employee’s interest in a qualified retirement plan must either be distributed in full to the employee no later than the required beginning date or beginning on that date must be distributed over the employee’s (and, if applicable, a designated beneficiary’s) life expectancy. IRC Sec. 408(a)(6) makes these same rules applicable to IRAs. The purpose of these requirements, known as the minimum required distribution (MRD) rules, is to prevent the continued postponement of tax due on funds held in retirement accounts.

The required beginning date (RBD) for participants in a qualified plan [including a 403(b) plan] is normally April 1 of the year following the later of the calendar year the participant reaches age 70½ or retires from the employer sponsoring the plan. The RBD for IRA owners (including SEP IRA and SIMPLE IRA owners) and for qualified plan participants who are more-than-5% owners of their employers is April 1 of the year following the calendar year in which they turn age 70½, even if they are not retired. The MRD rules don’t apply to Roth IRAs before the taxpayer’s death.

In a move that surprised almost everyone, the IRS has released a new set of proposed regulations that greatly simplify and generally improve the minimum distribution rules. Although they are proposed to be effective for distributions beginning next year, taxpayers are free to apply them now.

As you’ll see in the discussion that follows, the rules are generally very favorable. Thus, most people will presumably choose to adopt them this year.

Note: Because the distribution rules for qualified plans and IRAs are essentially the same and because the plan administrator normally does the calculations in the case of a qualified plan distribution, this article focuses on how the new proposed regulations apply to IRA distributions.

Back to top

Summary of the Major Changes

The newly issued proposed regulations simplify the MRD rules in several ways. For example:

They provide one table that all account owners can use to determine the required distributions during their lifetime. This makes it easier to calculate these distributions because taxpayers no longer need to (1) determine their beneficiary by their RBD, (2) decide whether to recalculate their life expectancy each year in determining required minimum distributions, or (3) satisfy a separate incidental death benefit rule in the case of a nonspouse beneficiary who’s more than 10 years their junior. Because the table assumes everyone has a beneficiary who is 10 years younger than they are, most taxpayers’ minimum distributions (beginning this year) will be less than they were in the past. (See Examples 1 and 2 later in this article.)

A copy of the "new" table is included as Appendix 1. [The table is not really new because it’s the same as one in former Prop. Reg. 1.401(a)(9)-2, Q/A-3 that previously applied only if the taxpayer had a nonspousal beneficiary who was more than 10 years younger than the taxpayer.]

The new rules permit distributions during the taxpayer’s lifetime to be calculated without regard to the beneficiary’s age. (However, if the taxpayer’s beneficiary is his or her spouse and that person is more than 10 years younger than the taxpayer, the required distributions may be reduced by taking into account the joint ages of the taxpayer and spouse and using Table VI in Reg. 1.72-9 to determine their joint life and last survivor life expectancy.) (See Examples 3, 4, and 5.)

The new rules allow the final determination of a taxpayer’s beneficiary to be made as late as the end of the year following the year of the taxpayer’s death [Prop. Reg. 1.401(a)(9)-4, Q/A-4]. This means taxpayers may change designated beneficiaries after their RBD without increasing their required distributions. (See Example 6.)

Because a person’s status as a beneficiary isn’t set until the year after the taxpayer’s death, this opens up several postmortem planning opportunities. For example, one or more beneficiaries could disclaim their interest (such as a son disclaiming an interest so that it flows to his kids). This rule also allows time for distributions to be made to buy out certain beneficiaries (such as a charity) so that the remaining beneficiaries can stretch out their IRA distributions over a longer period than what is allowed when an IRA has a beneficiary that’s not an individual [Prop. Reg. 1.401(a)(9)-5, Q/A-7(a)(1)]. And finally, if a taxpayer leaves behind an IRA with multiple beneficiaries, those beneficiaries can use this rule to either split the IRA into multiple IRAs with a single beneficiary for each or leave the IRA intact but create separate shares for each beneficiary. Choosing either option will allow each beneficiary to take distributions using his or her own life expectancy. If they do nothing, they’ll all have to take distributions from the IRA based on the life expectancy of the oldest beneficiary [Prop. Reg. 1.401(a)(9)-5, Q/A-7].

The new rules permit the calculation of postdeath MRDs to take into account the taxpayer’s remaining life expectancy at the time of death, thus allowing distributions in all cases to be spread over a number of years after death (even if the taxpayer failed to name a beneficiary). For example, if a taxpayer dies without a beneficiary and has already reached or exceeded his or her RBD, the IRA is distributed over the taxpayer’s remaining life expectancy as of the year of death. If a taxpayer dies before the RBD and has failed to name a beneficiary, the five-year rule applies [meaning the account must be distributed by the end of the fifth year following the taxpayer’s death—Prop. Reg. 1.401(a)(9)-3, Q/A-4(a)(2)]. (See Examples 7, 8, and 9.)

If the taxpayer has named a beneficiary, at death (regardless of whether it is before or after the taxpayer has begun taking required distributions), the balance in the account will normally be distributed over the life expectancy of the beneficiary [Prop. Reg. 1.401(a)(9)-5, Q/A-5]. However, if the taxpayer dies before the RBD, the regulations allow the retirement plan to require, or the taxpayer to elect, for the five-year rule to apply [Prop. Regs. 1.401(a)(9)-3, Q/A-4(b) and (c) and 1.401(a)(9)-5, Q/A-5(b)]. (See Example 10.)

As under the 1987 regulations, a special rule applies when the surviving spouse is the sole beneficiary and the IRA owner dies prior to the RBD. If the surviving spouse chooses not to rollover or make the IRA her own (we’ll discuss this later), she is allowed to delay distributions to the later of (1) the end of the calendar year after the year in which the IRA owner died or (2) the end of the calendar year in which the IRA owner would have reached age 70½ [Prop. Reg. 1.401(a)(9)-3, Q/A-3(b)].

See Appendix 2 for a chart that compares the old and new rules.

Back to top

Examples

Before we go any further, let’s look at some examples of how the major provisions in the new rules will apply.

Example 1: Taxpayer already taking minimum distributions. Back to top

Paul turns 77 this year and his wife, Ernestine, who is the beneficiary of all of his IRAs, will be 75. At the end of 2000, his IRA balances totaled $500,000. Under the 1987 proposed regulations (Table VI of Reg. 1.72-9), this would mean his required minimum distribution for this year would be $31,646 ($500,000 ÷ 15.8), assuming he elected to recalculate his and his wife’s life expectancies each year.

Under the new rules, he is required to take out $24,876 ($500,000 ÷ 20.1), a decrease of more than 20%. Of course, under either set of rules he is always free to take more than the minimum amount.

Example 2: First distribution is due by April 1. Back to top

June turned age 70½ on 8/4/00 and has yet to take her first required distribution (which is due by 4/1/01). The balance of her IRA at the end of 1999 was $500,000 and she has failed to name a beneficiary for it.

Under the old rules, June is required to take a distribution of at least $31,250 ($500,000 ÷ 16 from Table V of Reg. 1.72-9). Under the new rules, she would only be required to take $19,084 ($500,000 ÷ 26.2). However, June can’t use the new rules until she calculates her 2001 distribution that is due by 12/31/01. The distribution that must be taken by 4/1/01 is actually her 2000 distribution and the new regulations can only be used to calculate distributions for calendar year 2001 and later (IRS Ann. 2001-18).

Example 3: Beneficiary is a different age. Back to top

Same facts as Example 1, except that Ernestine is 72 rather than 75. Under the old rules, Paul would need to take out at least $29,070 ($500,000 ÷ 17.2 from Table VI of Reg. 1.72-9) from one or more of his IRAs. Under the new rules, the amount is still $24,876 because Ernestine’s age normally doesn’t matter as long as Paul is alive.

Example 4: When the spouse’s age does make a difference. Back to top

Same facts as Example 1, except that Ernestine is 56 (i.e., more than 10 years younger than Paul). Under the old and the new rules, Paul’s minimum required distribution is calculated using Table VI of Reg. 1.72-9. Thus, he has to take out at least $17,668 ($500,000 ÷ 28.3). Notice this is less than the $24,876 from Example 1 (which is good news assuming Paul is trying to stretch out his distributions for as long as possible).

Example 5: Nonspousal beneficiary more than 10 years younger. Back to top

Same facts as Example 4, except that Ernestine is Paul’s sister rather than his wife. Here, he has to take out at least $24,876 this year (i.e., the same amount as in Example 1) because even under the new rules a nonspouse beneficiary can be no more than 10 years younger for purposes of the calculation. In other words, the only time a beneficiary’s age matters while the account owner is still alive is if that beneficiary is the spouse and also more than 10 years younger than the account owner.

Example 6: Older beneficiary named after required beginning date. Back to top

Sheila turned 70½ several years ago and has been taking required minimum distributions from her IRAs ever since. Sheila’s sister Joan is the beneficiary of all of her IRAs, and Sheila has been using their joint life expectancy to calculate her required distributions each year.

In 2001, Sheila and Joan have a major disagreement and Sheila changes the beneficiary on all of the IRAs to her other sister, Karen (who’s four years older than Joan). Under the old rules, this beneficiary change would increase the distribution Sheila has to take each year. However, under the new rules, the change has no effect while Sheila is alive because the new distribution table uses only Sheila’s age.

Example 7: Estate as beneficiary and death after required beginning date. Back to top

The beneficiary of Jimmy’s IRAs is his estate, which, under both the old and new rules, means that he is deemed not to have a beneficiary. [See former Prop. Reg. 1.401(a)(9)-1, Q/A, D-2A and new Prop. Reg. 1.401(a)(9)-4, Q/A-3(a)]. Jimmy dies in 2001 shortly before reaching age 74. Beginning with the year after he turned age 70½, Jimmy has been taking minimum distributions that are determined based on his life expectancy, recalculated annually.

Under the old rules, because Jimmy’s life expectancy drops to zero in the year after his death [former Prop. Reg. 1.401(a)(9)-1, Q/A E-8(a)], the balance of his IRAs would need to be distributed by the end of 2002—potentially causing a large bunching of income in one year. Under the new rules, however, the IRAs can be distributed over Jimmy’s remaining life expectancy, using his age as of his birthday in the year of death. In subsequent years, the applicable distribution period is reduced by one for each calendar year that has elapsed since the calendar year of death [Prop. Reg. 1.401(a)(9)-5, Q/A-5(a)(2) and (c)(3)]. Jimmy’s life expectancy is determined using Table V of Reg. 1.72-9 [Prop. Reg. 1.401(a)(9)-5, Q/A-6(a)].

Putting all of these rules together, it appears that Jimmy’s minimum distribution in 2001 can be determined using the divisor from the table included in Appendix 1 (i.e., the new standard table) [see Prop. Reg. 1.401(a)(9)-5, Q/A-5(a)]. Thus, for 2001, his required distribution (regardless of whether it is taken before or after his death) will be the quotient of the 12/31/00 account balances of his IRAs (let’s say it’s $500,000) divided by 22.7, or $22,027.

For 2002, the minimum distribution that must come from his IRAs is the quotient of the 12/31/01 balance of those IRAs divided by 12.2. This divisor comes from Table V of Reg. 1.72-9 and is based on the factor (13.2) for the age Jimmy was (or would have been had he lived long enough) on his birthday in the year of death, reduced by one for the one calendar year that has elapsed since his death. In 2003, the minimum distribution will be determined in the same manner except that the divisor will be 11.2 (13.2 reduced by two years). In 2004, the divisor will be 10.2; in 2005, it will be 9.2; and so on.

Example 8: No beneficiary and death before required beginning date. Back to top

Same facts as Example 7, but when Jimmy dies in 2001 it is before his required beginning date. Here, the new rules require Jimmy’s entire IRA balances to be distributed by the end of the fifth calendar year after his death since an estate is not considered a designated beneficiary [Prop. Reg. 1.401(a)(9)-3, Q/A-4(a)(2)]. Thus, all of the IRAs must be depleted by 12/31/06. This is the same result that would apply under the old rules [see former Prop. Reg. 1.401(a)(9)-1, Q/A C-1].

Example 9: Estate as beneficiary and surviving spouse as estate beneficiary. Back to top

Same facts as Example 8 except that Jimmy’s surviving spouse, Wanda, is both the executrix of the estate and its sole beneficiary. Although neither the old or new rules treat an individual’s estate as a valid IRA beneficiary for purposes of the minimum distribution rules, under the old rules the IRS had allowed surviving spouses such as those in Wanda’s position to fix the accelerated distribution problem caused by not having a beneficiary. This was done by allowing the surviving spouse to roll the decedent’s IRA into an IRA set up for the surviving spouse (see, for example, PLRs 9545010 and 9831032). The new proposed regulations make no mention of this postmortem planning opportunity, thus it is unclear whether it will still work in a situation such as Jimmy’s. Obviously rather than hoping that it will work, it is to the taxpayer’s benefit to name a qualified beneficiary (i.e., an individual or a qualified trust) before death.

Example 10: IRA owner with a named beneficiary. Back to top

The balance of Tara’s IRAs on 12/31/00 was $600,000 and her IRA beneficiary is her brother Tyler. Tara dies in 2001, shortly after turning age 73 and before she has had a chance to take her required distribution for the year. Tyler turns 83 in 2001.

Under the new rules, Tara’s 2001 minimum distribution (which will obviously be paid after her death) is calculated using the table in Appendix 1 and using her age as of her birthday in 2001 [Prop. Reg. 1.401(a)(9)-5, Q/A-5]. Thus, $25,532 ($600,000 ÷ 23.5) must be distributed from her IRA in 2001. In 2002 and later years, minimum distributions are measured by the beneficiary’s (Tyler’s) remaining life expectancy as determined using Tyler’s age on his birthday in the calendar year following Tara’s death [Prop. Reg. 1.401(a)(9)-5, Q/A-5(a)(1) and (c)(1)]. If the balance of Tara’s IRA on 12/31/01 is $635,000, the minimum required distribution that Tyler must take in 2002 is $85,811 ($635,000 ÷ 7.4 from Table V of Reg. 1.72-9). In later years, the divisor will be reduced by one each year. Thus, the IRA’s balance at 12/31/02 will be divided by 6.4 to determine how much Tyler must take in 2003.

Back to top

Special Rules for Surviving Spouses

The 1987 proposed regulations provide that a surviving spouse’s election to treat an inherited IRA as his or her own IRA is deemed to be made if the surviving spouse contributes to the IRA or doesn’t take the minimum required distribution (MRD) under IRC Sec. 401(a)(9)(B) as a beneficiary of the IRA. The new rules clarify the circumstances under which the surviving spouse (let’s assume it is the wife) can elect to treat the decedent’s IRA as her own by providing that this is permitted (1) only after the distribution of the MRD for the husband’s year of death; and (2) only if the wife is the sole beneficiary of the account and has an unlimited right to withdrawal from the account. The new rules specifically say this requirement is not met if a trust is named as the designated beneficiary, even if the wife is the sole beneficiary of the trust [Prop. Reg. 1.408-8, Q/A-5(a)].

Under the new rules, a surviving spouse who meets the above requirements can make an affirmative election to treat the IRA as her own by redesignating the account in her name. Alternatively, she is deemed to have made this election under the same circumstances as the old rules [i.e., if she contributes additional funds to the IRA or doesn’t take an MRD at the appropriate time under IRC Sec. 401(a)(9)(B) as a beneficiary of the IRA].

The proposed regulations also clarify that, except for the MRD for the year of the owner’s death, a surviving spouse (assuming she is the beneficiary) can roll over a postdeath distribution from the decedent’s qualified plan to an IRA established in her name [Prop. Reg. 1.408-8, Q/A-7]. But if the surviving spouse is age 70½ or older, the minimum lifetime distribution required under IRC Sec. 401(a)(9)(A) must be made for the year and, because it is an MRD, cannot be rolled over.

Back to top

Trust as a Beneficiary

Only an individual can be a designated beneficiary for purposes of calculating MRDs. However, if a trust meets certain requirements [see new Prop. Reg. 1.401(a)(9)-4, Q/A-5(b)] and all its beneficiaries are individuals, the oldest beneficiary’s life expectancy is used to determine the MRD. The new regulations do not change the requirements for a trust’s "look through" status or for determining MRDs based upon the oldest beneficiary’s life expectancy. However, under the new proposed regulations, the burden on an IRA or plan trustee to receive documentation during the account owner’s life as to the beneficiaries of the trust is reduced [see Prop. Reg. 1.401(a)(9)-4, Q/A-6]. This is because a beneficiary designation is irrelevant for determining the account owner’s lifetime MRDs.

The proposed regulations clarify when remainder beneficiaries of the trusts are considered designated beneficiaries, and thus when their ages must be used to determine who is the oldest beneficiary for purposes of the MRD. According to the proposed regulations, if the trust income and/or principal can be accumulated during the primary beneficiary’s life for the benefit of the remainder beneficiaries of the trust, the remainder beneficiaries are included as designated beneficiaries (even though access to those amounts is delayed until after the primary beneficiary’s death). Thus, their ages must be included to determine the beneficiary with the shortest life expectancy.

If, however, the trust instrument requires all amounts distributed from the retirement account to be distributed to the primary beneficiary during his or her life, the remainder beneficiaries will not be included as designated beneficiaries. Thus, their ages will not be used to determine the beneficiary with the shortest life expectancy [Prop. Reg. 1.401(a)(9)-5, Q/A-7(c)(3), Examples 2 and 3].

Back to top

Permitted Delays

The new regulations permit the MRD for a year to be delayed (1) for up to 18 months during which an amount is segregated in connection with the review of a qualified domestic relations order pursuant to IRC Sec. 414(p)(7), and (2) while annuity payments under an annuity contract issued by a life insurance company in state insurer delinquency proceedings have been reduced or suspended by reason of the state proceedings [Prop. Reg. 1.401(a)(9)-8, Q/A-7 and Q/A-8].

Back to top

Reporting Requirements

To improve compliance with the minimum distribution rules, the IRS plans to require IRA trustees to report the amount of the required minimum distribution from that particular IRA to the IRA owner (or beneficiary) and to the IRS (Prop. Reg. 1.408-8, Q/A-10). These new reporting requirements would apply regardless of whether the IRA owner plans to take the required minimum distribution from that IRA or another one. Guidance on exactly how to comply with the reporting rules is to be provided in future releases of the appropriate IRS forms and instructions—something the IRS says will not occur any earlier than next year.

Back to top

Appendix 1
Applicable Divisors for Determining Minimum Distributions¹

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

¹ This table is the same as the minimum distribution incidental benefit (MDIB) table from Prop. Reg. 1.401(a)(9)-2, Q/A-3 that applied under the 1987 regulations when a nonspouse beneficiary was more than 10 years younger than the retirement account owner.

Back to top

Appendix 2
Comparison of the Rules Under the 1987 and 2001 Minimum Distribution Proposed Regulations

		Minimum Required Distributions (MRDs)
		__________________________________________
	Designated Beneficiary	Old Rules	New Rules¹
	________	____ ________	____________
Lifetime MRDs beginning at RBD² and continuing through year of death	None³	Owner’s single life determined using recalculation or term certain, as elected.	Minimum Distribution Incidental Benefit (MDIB) table (see Appendix 1).
	Nonspouse	Joint life determined using recalculation or term certain, as elected, for the owner and term certain for the beneficiary. However, if beneficiary is more than 10 years younger than owner, the MDIB table is used instead.	MDIB table (see Appendix 1).
	Spouse	Joint life determined using recalculation or term certain as elected for owner and spouse.	MDIB table or, if spouse is sole beneficiary and more than 10 years younger, joint life using recalculation method.
Postdeath MRDs beginning the year after the owner’s death
Death before RBD²	None³	5-Year rule.	Same as old rule.
	Nonspouse	5-Year rule (default) or, if elected or required, beneficiary’s single life starting no later than December 31 of the year following the year of the owner’s death.	Single life starting no later than December 31 of the year following the year of the owner’s death (default), or if elected or required, the 5-Year rule.
	Spouse	Spouse’s single life beginning when owner would have turned 70½ (default) or, if elected or required, the 5-Year rule. Spousal rollover also allowed.	Same as old rule.
Death after RBD²	None³	If term certain elected at RBD, owner’s remaining single life expectancy. If recalculation elected at RBD, entire account must be distributed by December 31 following the year of the owner’s death.	Owner’s single life expectancy calculated in the year of death and reduced by one each year thereafter (i.e., using term certain).
Death after RBD² (Continued)	Nonspouse	If term certain elected for owner at RBD, remaining joint life expectancy.	Beneficiary’s single life expectancy calculated in the year following the year of the owner’s death and reduced by one each year thereafter (i.e., using term certain).
		If recalculation elected for owner at RBD, beneficiary’s single life expectancy.
		MDIB table no longer applies.
	Spouse	If, at RBD, term certain elected for both, remaining joint life expectancy. If, at RBD, term certain elected only for owner: (1) if owner dies first, remaining joint life expectancy at owner’s death and remaining single life expectancy of owner at spouse’s death, (2) if spouse dies first, owner’s remaining single life expectancy.	Spouse’s single life expectancy determined using recalculation. At spouse’s death MRDs are made over the spouse’s remaining single life expectancy determined in the year of death and reduced by one each year thereafter (i.e., using term certain method). Spousal rollover also allowed.
		If, at RBD, term certain elected only for spouse: (1) if owner dies first, spouse’s remaining single life expectancy, (2) if spouse dies first, remaining joint life at spouse’s death and remaining single life expectancy of spouse at owner’s death.
		If, at RBD, recalculation elected for both, at first death use single life of owner or spouse (whichever survives). At death of both, entire account must be distributed by December 31 of the year of the last death.
		Spousal rollover also allowed.

¹ The new rules are proposed to be effective for determining minimum required distributions (MRDs) for 2002 and later. However, for calendar year 2001 MRDs, either the old or new rules may be used.

² The owner’s required beginning date (RBD) for someone participating in a qualified plan [including a 403(b) plan] will normally be April 1 of the year following the later of the calendar year the participant (1) reaches age 70½, or (2) retires from the employer sponsoring the plan [IRC Sec. 401(a)(9)(C)]. The RBD for IRA owners (including SEP IRA and SIMPLE IRA owners, but excluding Roth IRA owners) and qualified plan participants who are more-than-5% owners of their employers is April 1 of the year following the calendar year in which they turn age 70½, even if they are not retired. Once begun, minimum distributions must generally continue each year. (Roth IRA owners are not subject to the MRD rules, even though their beneficiaries are.)

³ For MRD purposes, only individuals and certain trusts are considered designated beneficiaries.

Back to top