SPECIAL REPORT

At Freeman & Davis LLP,
we believe in keeping our clients informed

RULES FOR REQUIRED MINIMUM DISTRIBUTIONS FROM RETIREMENT PLANS SUBSTANTIALLY SIMPLIFIED IN FAVOR OF TAXPAYERS

In 2001, the IRS proposed new rules governing "required minimum distributions" (RMD) from IRAs and other retirement plans that will make it much easier for retirees to figure out the minimum amount they must withdraw each year.  The new rules also allow smaller required minimum distributions, thus allowing a greater tax-deferred accumulation of wealth.  These changes bring good news for everyone.

Under the old rules, once an individual reached 70 1/2, many decisions had to be made which affected income tax, estate tax and total family wealth transfers.  The impact of these decisions were generally irrevocable.  Prior to beginning the required distributions, one had to determine who would be the beneficiary of the IRA, whether to take the payments based on a single life or joint and survivor annuity basis and whether to recalculate life expectancy each year or not.

The proposed regulations provide a single table that recipients can easily use to calculate their yearly RMD amount based upon their age at their birthday in the year of distribution and the prior year-end balance of their retirement account or IRA.  The new table will be used by everyone and is based on a joint and survivor annuity with a beneficiary who is ten years younger than the owner, regardless of the actual age difference.  The table is sometimes referred to as the Minimum Distribution Incidental Benefit (MDIB) table.  The MDIB table will provide for a longer payout period than under current rules.  The only exception to the use of this table is if the owner's spouse is more than ten years younger.  If so, an election can be made to use a joint and survivor table using the actual ages of the owner and spouse, resulting in lower withdrawal requirements. 

Another area of simplification is the concept of a designated beneficiary.  Under prior regulations, the RMD calculation was dependent upon the age of the designated beneficiary as the required beginning date of the RMD (generally by April 1 of the year after the year in which the owner attained age 70 1/2)  Instead of being fixed by the owners required beginning date, the designated beneficiary can now be determined as late as the end of the year following the year of the owners death.  This change permits the owner to change designated beneficiaries after the required beginning date without increasing RMD's and also allows the changing of beneficiaries through post-mortem disclaimers.  As a planning note, the owner should name not only a primary beneficiary or beneficiaries, but also contingent beneficiaries.

Under the old rules, the default rule for post-death distributions to a nonspouse beneficiary required that the entire balance in the account be distributed before the end of the fifth year following the death of the IRA owner if death occurred before the required beginning date.  Now, the proposed regulations change the default rule to the life expectancy of the beneficiary regardless of whether death occurs before or after the owner's required beginning date.

These new proposals are automatically applicable to IRAs. Qualified plans such as 401(k) plans, pension and profit-sharing plans, however must be amended to provide specifically for these changes. 

Although these regulations are applicable for RMDs in the 2002 calendar year, RMDs for 2001 may be calculated using the new proposed regulations or the prior law, if so desired. 

Because of the sweeping nature of these beneficial changes, all owners of IRAs and participants in qualified plans should review their beneficiary designations and other elections in order to take full advantage of the changes proposed by the IRS.  Please call us so that we can help you plan properly for the future.