By Bob Rywick
The Internal Revenue Service has issued final and temporary regulations on required minimum distributions from separate accounts in qualified plans, traditional IRAs and internal revenue code § 403(b) contracts.
The new regulations generally apply to determining RMDs for calendar years beginning after 2002. For distributions in calendar year 2002, taxpayers may rely on either the new regulations or the proposed regulations issued in 2001 or the proposed regulations issued in 1987 to determine RMDs. This is so even if the taxpayer or the taxpayer’s beneficiary started taking mandatory distributions before 2002.
The rules in the new regulations are similar to those in the 2001 proposed regulations. However, they include revisions of the life expectancy tables used to figure RMDs that generally result in smaller yearly required distributions for IRA and qualified plan account owners and their beneficiaries.
Also, the rules for splitting an IRA into two or more separate accounts for RMD purposes have been clarified. One disadvantage of the new regulations is that they give beneficiaries less time to make some after-death planning moves than was available under the 2001 proposed regulations.
Key rules for determining RMDs. The final regulations retain the following rules for determining RMDs contained in the 2001 proposed regulations.
(1) The RMD each year to the account owner from an IRA or an individual account under a qualified plan is determined by dividing the account balance as of the end of the previous year by the life expectancy factor from a uniform table. The uniform table is used where the account’s designated beneficiary either is not the account owner’s spouse or is the account owner’s spouse but the spouse is not more than 10 years younger than the owner.
If a spouse-beneficiary is more than 10 years younger than the owner, a joint life and last survivor life expectancy table is used to determine the RMD. This distribution will be less than the distribution under the uniform table.
Observation: The uniform table is also a joint life and last survivor life expectancy table, but it is based on the assumption that the account owner has a beneficiary who is 10 years younger than the owner. This is so regardless of the beneficiary’s exact age (even if the beneficiary is older than the owner) or even if there is no designated beneficiary.
(2) The following rules apply to non-annuity-type distributions after the death of the account owner.
... If the account has a designated beneficiary, the RMDs of the remaining account balance must be made over the remaining life expectancy of the beneficiary regardless of whether the owner died before or after the date he was required to begin taking distributions. Generally, this date is April 1 of the year following the year the account owner reached 70-1/2.
... If the account does not have a designated beneficiary, and the account owner dies after he was required to begin taking distributions, RMDs of the remaining balance must be made out over the remaining life expectancy of the account owner.
... If the account does not have a designated beneficiary, and the account owner dies before his or her required beginning date, the account balance must be paid out within five years after the owner’s death.
Effect of new life expectancy tables on distributions during the account owner’s life. The new regulations modify the life expectancy tables that are used to determine required minimum distributions to reflect current life expectancies. Since current life expectancies are longer than they were when the previous tables were issued in 1983, RMDs are spread out over a longer period. Thus, smaller yearly distributions are required than under the 2001 proposed regulations.
Example (1): Your client will be 70-1/2 in 2002, but will not be 71 until 2003. The balance in her traditional IRA at the end of 2001 was $356,200. Under the new uniform lifetime table in Reg ¤ 1.401(a)(9)-9, her required minimum distribution for 2002, the year in which she reaches 70-1/2, is found by dividing $356,200 by 27.4, the revised factor in the new uniform table for an IRA owner age 70 (your client’s birthday in 2002). This results in a RMD of $13,000 for 2002.
Under the 2001 proposed regulations, her RMD for 2002 would be $13,595 (her ending IRA balance on Dec. 31, 2001 of $356,200 divided by a uniform table factor of 26.2).
Observation: While your client in Example (1) could delay taking her distribution for 2002 until 2003, the year after she becomes 70-1/2, she would be required to take a second distribution (the distribution for 2003) by the end of that year, as well. Thus, she would have to include two distributions in her income in the same year. Even if she delays taking the RMD for 2002 until 2003, the amount of the distribution would be the same, i.e., it would be calculated based on her life expectancy in 2002 and the value of her IRA at the end of 2001.
Recommendation: If, in Example (1), your client wishes to minimize the amount that she is required to receive as a distribution in 2002, she should elect to compute the RMD under the final regulations instead of the 2001 proposed regulations.
Example (2): Your client will be 77 in 2002. The value of his traditional IRA at the end of 2001 was $148,400. He had previously been taking RMDs from his traditional IRA under the rules contained in the 1987 proposed regulations based on his and his wife’s joint life and last survivor life expectancy. His wife will be 74 in 2002. He, now, may elect to determine his RMD under either the 2001 proposed regulations or the final regulations.
Under the final regulations, his RMD will be $7,000 ($148,400 divided by 21.2, the revised factor in the new uniform table for an IRA owner age 77). Under the 2001 proposed regulations, his RMD for 2002 would be $7,383 ($148,400 divided by 20.1, the factor for an IRA owner age 77 under the former uniform table).
Under the 1987 proposed regulations, his RMD would have been $9,160 ($148,200 divided by 16.2, the factor under the joint life and last survivor table for an IRA owner age 77 with a designated beneficiary who is 74).
Observation: The new regulations only lower the amount of the RMD. If the IRA owner needs a larger distribution, he can still take it. For example, in Example (2), your client could continue to calculate his distribution under the 1987 proposed regulations. By doing so, it would only mean that he is taking a larger distribution than he has to.
Effect on substantially equal periodic payments before age 59-1/2. A 10 percent penalty tax is imposed on distributions from an IRA or qualified plan before age 59-1/2 unless an exception to imposition of the penalty applies. One exception is for substantially equal periodic payments that were made at least yearly over the life or life expectancy of the account owner (or the joint life and last survivor life expectancy of the account owner and his or her designated beneficiary).
An allowable method for determining substantially equal periodic payments under Notice
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