NEW IRA DISTRIBUTION RULES
Many retirees and heirs of retirees received a tax cut prior to the Bush Administration proposing its tax reduction plan. This tax deduction is the result of regulations implemented January 1, 2002 that made sweeping changes to the Rules on distributions from IRA’s, 401K’s and most other tax favored retirement plans.
The old proposed regulations were issued by the IRS in 1987 and never finalized. In their unfinalized status, the old rules became somewhat of a quagmire of complex regulations that contained many pitfalls for the uninformed. The new proposed regulations simplify the old rules by:
- Providing a simple, uniform table that can be used to determine the required minimum distribution during lifetime and after death. This makes it far easier to calculate the required minimum distribution because plan participant’s would:
- No longer need to determine their beneficiary by their required beginning date.
- No longer need to decide whether or not to recalculate their life expectancy each year in determining required minimum distributions, and
- No longer need to satisfy a separate incidental death benefit rule.
- Permitting the required minimum distribution during the IRA owner’s lifetime to be calculated without regard to the beneficiary’s age (except when required distributions can be reduced by taking into account the age of a beneficiary who is a spouse more than 10 years younger than the IRA owner).
- Permitting the beneficiary to be determined as late as the end of the year following the year of the IRA owner’s death. This allows:
- The IRA owner to change designated beneficiaries after the required beginning date without increasing the required minimum distribution.
- The beneficiary to be changed after the IRA owner’s death, such as by one or more beneficiaries disclaiming or being cashed out.
- Permitting the calculation of post-death minimum distributions to take into account an IRA owner’s remaining life expectancy at the time of death, thus allowing distributions in most cases to be spread over a number of years after death.
Providing a simple, uniform table that can be used to determine the required minimum distribution during lifetime and after death. This makes it far easier to calculate the required minimum distribution because plan participant’s would:
These simplifications have the effect of reducing the required minimum distributions for the vast majority of IRA owners. For instance, under the old rules, IRA owners had to lock in their minimum distributions by picking the method of calculating the distribution by April 1st of the year following the year they turned 70 ½. The new Rules instead provide a uniform table to determine the minimum distributions which only require the smallest minimum distribution allowed under the old Rules. For many IRA owners who wish to take minimum distribution from their IRA, now is a good time to rethink their original decisions when they started taking distributions from their IRA. Under the new Rules, minimum distributions of inherited IRA’s are based on the life expectancy of the beneficiary. Also, under the new Rules, the beneficiary designation does not have to be finalized until December 31st of the year following death. This means the IRA owners can change their beneficiary whenever they wish up until their death with no adverse tax consequences. Further, the new Rules will provide more flexibility in posthumous planning.
For beneficiaries that inherited IRAs there exists the possibility of electing a new time period over which the IRA may be distributed, (if still within the time period to make election). Beneficiaries of inherited IRAs may want to consider:
- Dividing the IRA into separate accounts for multiple beneficiaries with different life expectancies to avoid the oldest beneficiary rule which requires the use of the single life expectancies of the oldest beneficiary.
Disclaiming the IRA, allowing it to pass to a contingent and perhaps younger beneficiary.The New Rules do not change the Rules for determining the required beginning date for minimum distributions or the estate tax treatment of IRA’s. But they do provide a more flexible approach to selecting beneficiaries of IRA’s and pre-planning the period over which the IRA will be distributed. Anyone who has inherited an IRA, should review their options under the New Rules as there may be opportunities to maximize benefits that were not available when they inherited the IRA. If you are interested in learning more about the new IRA Distribution Rules, please contact our office for an appointment.