By Margaret A. Kruse
In late April the IRS published final regulations on how to calculate Minimum Required Distributions. The regs have been proposed since 1987, and now they are final.
The final regs basically follow the 2001 proposed regs (with the Uniform Table instead of joint and single life, recalc, term certain, MDIB, ect.) So most of the things you learned last year still apply. But after getting feedback on the 2001 proposed regs, the IRS changed some things for the final regs. Here are some of the important changes since last year:
New actuarial assumptions on MDR tables.
Life expectancy is longer now than it was when the tables were first published. Since life expectancies are longer, the minimum distribution will be smaller. For example, the life expectancy for a 70-year under the 2001 Uniform Table was 26.2 years. Now it’s 27.4. Although the final regs become official in 2003, you can use these new tables, the 2001 tables or ’87 proposed regs for 2002. You will find these tables attached in the second page.
When you delay in taking your first MRD until April 1 of the calendar year after the year of turning 70½, you cannot subtract out the MRD for year 1 end balance when figuring the distribution for year 2.
This rule will give you a higher distribution in year 2 than we expected under the 2001 rules. For example, Client turns 70½ in November 2002. His first distribution, attributable to 2002, must be taken by April 1, 2003. Suppose he does wait until April 2003. The year-end balance in 2002 still includes his 2002 MRD, because he hasn’t taken it yet. When you figure the MRD for 2003, you take the year-end balance for 2002 and divide it by the life expectancy. You DO NOT subtract out the MDR attributable to 2002 from the year-end balance.
Marital status is determined on January 1 of the year.
So if a spouse more than 10 years younger dies or divorces during the year, you are still ok taking the smaller distribution from Table IV for the year instead of Uniform table. This fixes a problem of the past: Client is married to someone more than 10 years younger. Under the 2001 rules, the client had to be married for the entire year to use the longer life expectancy (therefore smaller distribution) of Table IV. Suppose the client took the smaller Table IV distribution as the MRD, then the spouse died in late December. Since the client wasn’t married for the entire year, he should have taken the larger distribution under the Uniform table. But of course, client now has other things on his mind and doesn’t get around to it. Client is subject to a 50% penalty for taking too small a distribution. The final regs fix the problem by determining marital status on Jan 1.
An IRA owner can do a trustee-to-trustee transfer of her IRA after 70½ without taking MRD from that account first.
Of course, she still has to take the MRD sometime before year-end.
The date for determining whom the designated beneficiary is after the owner dies has been moved up from 12/31 of the year after death to 9/30.
In the proposed regs, you had to figure who the designated beneficiary was by 12/31 in the year after the year of death. But you also had to pass out the first minimum distribution by that day. So now the IRS has moved up the DB date. You figure out who the designated beneficiary is by 9/30, and then you have 3 months to take that minimum distribution based on the DB’s life.
But notice that this also reduces the time for people to disclaim and cash out to change the designated beneficiary. For example, if the owner named a charity and a child as beneficiaries, you only have until 9/30 to cash out the charity so that the child will be the sole beneficiary and can use his life expectancy for minimum distributions. (If the charity is still named as DB on 9/30, the distributions to the child and the charity could only be made over the deceased owner’s life expectancy or 5 years, depending on how old the owner was when he died.)
The final regs clarified that dying does not get you out of the pool of beneficiaries for figuring who the DB is.
If a child was the oldest beneficiary on his mother’s IRA when his mother died, then he dies before 9/30 of the next year; child will still be the measuring life for figuring the MRD. Disclaimers and cash outs are the only way to get out of the DB pool. If you name a trust as beneficiary, and want to look through the trust to the beneficiaries of the trust to be the DB, you must provide copies of the trust to the IRA custodian or trustee by October 31.
An IRA can be separated into accounts for each beneficiary, and each beneficiary can use his/her own life expectancy, if separation is done by the end of the year after the year of the owner’s death. The beneficiaries can also invest their accounts differently.
If you currently have clients who are beneficiaries on a deceased owner’s account and they are using the default 5-year rule, you can switch to the life expectancy rule as long as you take all distributions which should nave been taken under the life expectancy rule by the end of the 5 year period or December 31, 2003, whichever is sooner.
The IRS published new temporary regs when you have an annuity to satisfy an MRD. Prior to annuitizing, annuities figure MRDs just like any other account, except that the value is the dollar amount credited to the owner or beneficiary plus the actuarial value of other benefits (such as minimum survivor benefits) that will be provided under the contracts. I am talking to our actuaries to figure out what that means.
If you annuitize the annuity, there are lots of regs about amount of annuity payment. You can annuitize over a term certain provided that the length of the term is within the Uniform Table, or in the case of a beneficiary, the single life table.
New reporting requirements:
The trustee or custodian will not have to report the amount of MRD to the owner or beneficiary each year. Instead they must alert owners each year that an MRD is required and offer to calculate it for them. This makes our job simpler and may prevent some confusion by beneficiaries (e.g., may not understand that they can aggregate IRAs). We also do not have to report to beneficiaries after the owner dies, or report on 403(b) plans or Roth IRAs.
This is not an exhaustive list of changes, but I’ve highlighted the most important ones. We are updating the 2002 Tax Reference Sheet with new tables, since you can use the new tables this year. They should be ready shortly (within days). For more information or to order copies contact Steve Puth at 800-537-2476 or firstname.lastname@example.org
The tables are below.
Not intended to be legal or tax advice. Consult a qualified tax advisor regarding specific circumstances.
By: Margaret A. Kruse
Product Tax Counsel
Integrity Life Insurance Company (502)582-7945
What is the life expectancy for an individual for purposes of determining required minimum distributions under section 401(a)(9)? AFTER OWNER DIES
The following table, referred to as the Single Life Table, is used for determining the life expectancy of an individual:
|Single Life Table|
|Age||Life Expectancy||Age||Life Expectancy||Age||Life Expectancy||Age||Life Expectancy|
|25||58.2||54||30.5||83||8.6|| || |
|26||57.2||55||29.6||84||8.1|| || |
|27||56.2||56||28.7||85||7.6|| || |
|28||55.3||57||27.9||86||7.1|| || |
What is the applicable distribution period for an individual account for purposes of determining required minimum distributions during an employee’s lifetime under section 401(a)(9)?
Table for determining distribution period. The following table, referred to as the Uniform Lifetime Table, is used for determining the distribution period for lifetime distributions to an employee in situations in which the employee’s spouse is either not the sole designated beneficiary or is the sole designated beneficiary but is not more than 10 years younger than the employee.
Last Updated: 12/15/2002 11:44:00 AM
|Uniform Lifetime Table|
|Age of employee period||Distribution period||Age of employee||Distribution|