IRA Minimum Distributions-New Proposed Regulations

A QUICK SUMMARY

IRA MINIMUM DISTRIBUTIONS: THE NEW PROPOSED REGULATIONS

On January 11, 2001, the IRS issued a new set of proposed regulations under section 401(a)(9) of the Internal Revenue Code. This section requires certain minimum distributions from IRAs and qualified retirement plans. These are the rules that require IRA owners to start taking distributions from their IRAs no later than April 1 following the year in which they reach age 70 ½ . This April 1 date is known as the “Required Beginning Date”.

To date, the law in this area has been governed by proposed regulations issued in 1987 that were never finalized. The new proposed regulations make substantial changes to the 1987 proposed regulations and will make it much easier for taxpayers, IRA owners, and plan administrators to understand and apply the minimum distribution rules. The new proposed regulations simplify the calculation of the required minimum distribution during the individual’s lifetime and the determination of a designated beneficiary for distributions after death.

Effective Date: The regulations are proposed to be applicable for determining required minimum distributions for calendar years beginning on or after January 1, 2002. For determining required minimum distributions for calendar year 2001, taxpayers may rely on these proposed regulations or on the 1987 proposed regulations. If, and to the extent, future guidance is more restrictive than the guidance in the proposed regulations, the future guidance will be issued without retroactive effect.

Lifetime Minimum Distributions: For lifetime required minimum distributions, the new proposed regulations provide a uniform distribution period for all IRA owners of the same age. The uniform distribution period is equal to the joint life expectancy of an individual and a survivor 10 years younger. As such, it would lengthen the lifetime distribution period for most IRA owners. An exception applies if the IRA owner’s sole beneficiary is the IRA owner’s spouse and the spouse is more than 10 years younger than the IRA owner. In that case, the IRA owner is permitted to use the longer distribution period measured by the joint life and last survivor life expectancy of the IRA owner and spouse. Accordingly, the new rules will generally eliminate the need to fix the amount of the distribution during the IRA owner’s lifetime based on the beneficiary designated on the required beginning date (“RBD”) and will eliminate the need to elect recalculation or no recalculation of life expectancies at the RBD.

Post-Death Minimum Distributions: For years after the year of the IRA owner’s death, the distribution period is generally the remaining life expectancy of the designated beneficiary. The beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the IRA owner’s death, reduced by one for each subsequent year.

If the IRA owner dies after the RBD and there is no designated beneficiary as of the end of the year after the IRA owner’s death, the distribution period is the IRA owner’s life expectancy calculated in the year of death, reduced by one for each subsequent year. If the IRA owner dies before the RBD and there is no designated beneficiary as of the end of the year after the IRA owner’s death, the IRA must be distributed within 5 years after death.

There are special rules if the surviving spouse is the beneficiary. In addition, the old rules allowing the surviving spouse to treat the inherited IRA as his or her own are retained and clarified.

In all cases, whether there is a “designated beneficiary” must be determined by December 31 of the year after the IRA owner’s death, and not as of the RBD. Therefore, significant post-mortem planning should be possible.

To an article about the old IRA distribution rules

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