On January 11, 2001, IRS issued sweeping revisions to the proposed regulations to IRC section 401(a)(9). This is the Code section governing required minimum distributions (“RMD”) from pension and profit sharing plans, IRAs, and TSAs (the so-called “70-1/2 rules”).
The mandatory application of the new rules begins January 1, 2002, but taxpayers may elect to follow the new rules for RMDs in calendar year 2001 if they so choose. In this unexpected move, the IRS has completely revised the RMD rules. Everything that you (or anyone else) knew about the 70-1/2 rules has been rendered totally obsolete!
Over the next several months, we will undoubtedly publish numerous articles examining the details of these new rules, but in the meantime you need to know the broad outlines of the revisions to the proposed regulations.
Uniform Life Expectancy Table
- Lifetime distributions will be determined using a uniform life expectancy table.
- Because a uniform life expectancy table is used, it will no longer matter who the beneficiary is or what the beneficiary’s age is. The only exception to this rule is that a married owner naming his/her spouse as beneficiary may use actual joint life expectancy if the spouse is more than 10 years younger than the owner.
- The old rules regarding recalculation and non-recalculation are discarded.
- Under the new rules, the prior December 31st account balance will be divided by the appropriate factor from the uniform table, thereby producing the RMD. That’s it – no concern over who is the beneficiary, calculation or non-recalculation, etc.
RMD at Death of Owner
|Owner’s Age||Factor||Owner’s Age||Factor|
|93||8.8|| || |
If the deceased owner has already commenced RMDs, that is, he/she is past the required beginning date, then a required minimum distribution must be taken from the account for the year of death - calculated by reference to the uniform life expectancy table - using the owner’s age in the year of death. Distributions in subsequent years will be determined according to the rules set out below. If the deceased owner had not yet reached the required beginning date, the first year in which a minimum distribution is required is the calendar year following the year in which the owner died. RMDs in subsequent years will be determined according to the rules set out below.
Non-Spouse Designated Beneficiary
If there is a non-spouse designated beneficiary, the account must be distributed over the designated beneficiary’s remaining life expectancy, calculated as follows: (1) determine the designated beneficiary’s life expectancy using the beneficiary’s age at the end of the calendar year following the year of the owner’s death and the uniform life expectancy table above, and (2) in each subsequent year, subtract one (1) year from the number used in the prior year.
In the case of a surviving spousal beneficiary, the spouse may choose to treat the account as an inherited account, or do a rollover into an IRA in her own name.
The surviving spouse of a decedent IRA owner may elect to treat an inherited IRA as the spouse’s own. Such election is permitted, however, only, (1) after the distribution of the RMD for the account, if any, for the year of death, and (2) if the surviving spouse is the sole beneficiary with an unlimited right to withdraw from the account. This second requirement is not met if a trust is named as beneficiary, even if the spouse is sole beneficiary of that trust. If the account is maintained as an inherited account by the surviving spouse, each year’s RMD is calculated by referring to the uniform life expectancy table using the spouse’s actual age in that year.
Concerning the rollover option, in general, except for the deceased spouse’s RMD for the year of death, the surviving spousal beneficiary could rollover the remaining account balance into his or her own IRA. The new regulations do make it clear, however, that if the surviving spouse is 70-1/2 or older, the minimum lifetime distribution for the survivor must be made for the year and, because it is a required distribution, that amount is also not eligible for rollover.
No Designated Beneficiary
If the deceased owner had already reached his or her required beginning date and there is no designated beneficiary, life expectancy is determined by reference to the uniform life expectancy table using the owner’s age in the year of death. In each subsequent year, the RMD is calculated by subtracting one (1) year from the number used in the prior year.
In the event the deceased owner had not yet begun RMDs and there is no designated beneficiary, then, and only then, would the “old 5-year rule” apply automatically. That is, the entire account balance would need to be distributed by the end of the fifth year following the year of death.
The identity of the designated beneficiary of a qualified account is determined as of the end of the calendar year following the year in which the account owner dies rather than at the required beginning date as under the 1987 proposed regulations. This means the owner can change the beneficiary at any time without affecting the required minimum distributions. Further, the designated beneficiary may change even after the owner’s death; for instance, a named beneficiary might disclaim in favor of another beneficiary. A trust may be considered to be a designated beneficiary under rules substantially similar to the existing ones.
Until now, there has been no required RMD reporting. This means the IRS has had no way of knowing whether or not taxpayers were in fact taking required minimum distributions and no practical way of imposing the 50% excise tax as a penalty for missed distributions. In addition to the new RMDs being much simpler, they are also now going to be reported.
For instance, the proposed regulations will require the trustee or custodian of each IRA to report to both the IRA owner and the IRS the amount of required minimum distribution for that particular account according to forms and procedures to be developed by the IRS. It seems apparent that the IRS is going to develop a system of forms, procedures, and rules to assure that RMDs are taken and reported, and that the 50% excise tax for failing to take RMDs will be enforced.
Last Updated: 12/15/2002 11:48:00 AM