by Bob Rywick
The required minimum distribution from a traditional IRA for a calendar year is a percentage of the value of the IRA on Dec. 31 of the preceding calendar year. However, under the proposed regulations issued in 2001, certain adjustments had to be made to the year-end value of the IRA to reflect transactions that occurred in the following year. The 2002 final regulations no longer require all of the adjustments that were required by the proposed regulations.
Distribution for first distribution year that is not made until second distribution year no longer reduces value for purposes of determining RMD for second distribution year. Suppose the IRA owner delays taking his first RMD until the second required distribution year. Under the proposed regulations, the value of the IRA for purposes of determining the RMD for the second distribution year was reduced by the amount of this distribution.
Example (1): Your client’s first required distribution year is 2002, and her RMD for that year is $5,000. She decides to delay taking her distribution for 2002 until April 1, 2003. The value of her traditional IRA on Dec. 31, 2002 is $144,125. Under the 2001 proposed regulations, in determining the RMD for 2003, this value would have been reduced by the $5,000 required distribution for 2002 even though that distribution was not taken until 2003. Under the 2002 final regulations, however, this value is not reduced by the 2002 distribution taken in 2003.
Accordingly, if your client is 71 in 2003, Her RMD for that year is $5,438 ($144,125 divided by 26.5, the factor from the Uniform Table for an individual who is 71).
Correction: In my column in the last issue, I used a similar example but did not reflect the change in the rule that was made by the final regulations. In that column, I mistakenly reduced the value of the IRA by the RMD of $5,000 made in 2003 for 2002. Thus, I calculated the RMD for 2003 as only $5,250 ($139,125 divided by 26.5) instead of $5,438, the correct amount.
Observation: For IRA owners who wish to minimize the size of their RMDs from traditional IRAs, the new rule is another factor that weighs against delaying taking the first RMD until the second distribution year. If, in the above example, the first required minimum distribution had been taken on Dec. 31, 2002, the amount of the distribution would have reduced the value of her IRA by $5,000 for purposes of determining her RMD for 2003. If that had been done, her RMD for 2003 would have been $5,250.
Contributions made in first required distribution year for preceding year not taken into account in determining first RMD.
An IRA owner may make a contribution to his/her IRA for a tax year by the due date (without extensions) for filing the return for that tax year. This means that a calendar-year taxpayer may make an IRA contribution for one year by April 15 of the next year. If a contribution is made by April 15 of the first required distribution year for the preceding calendar year, under the 2002 final regulations, that contribution is not taken into account in determining the value of the IRA for purposes of determining the first RMD. Under the 2001 proposed regulations that contribution would have been taken into account.
Example (2): Your client will be 70-1/2 in 2003. He will be eligible to make a contribution of $3,500 to the IRA for 2002, the last year before his first required distribution year. If your client delays making that contribution until 2003, then, under the 2002 final regulations, the amount of the contribution will not be taken into account in determining the value of the IRA on Dec. 31, 2002, and thus the amount of his RMD for 2003. This is so even if he delays taking that first RMD until 2004. Under the 2001 proposed regulations, he would have had to include the $3,500 contribution for 2002 in the value of the IRA in determining the RMD for 2003 even if the contribution had not been made until 2003.
Rollovers not in any account as of Dec. 31. If an individual takes a distribution from a traditional IRA or a qualified plan, he has 60 days to roll it over to another traditional IRA. Suppose an individual takes the distribution in one year, and doesn’t roll it over to an IRA until the next year. In that case, the value of the transferee IRA as of the end of the year in which the distribution is made is increased by the amount of the distribution even though it’s not received until the following year. If property instead of cash is rolled over, the amount included is the value of the property when it is received by the transferee IRA.
Example (3): Your client, a widow, will be 70-1/2 in 2002, and is the owner of a traditional IRA. The value of this IRA was $150,000 on Dec. 31, 2002. She was also a participant in a defined contribution plan of her employer. On Dec. 15, 2001, she received a complete distribution of her interest in the defined contribution plan. The distribution consisted of $50,000 in cash and stock and securities with a value of $200,000 at the time of distribution. On Feb. 1, 2002, she rolled over the cash of $50,000 and all the stock and securities distributed from the plan to her IRA. At the time of the rollover, the stock and securities were worth $170,000. The value of your client’s IRA on Dec. 31, 2002 is treated as $370,000 [(actual value of $150,000, plus rollover amount of $220,000 (cash of $50,000 plus stock and securities of $170,000)]. Thus, if your client is 70 in 2002, her first required distribution year, the amount of her RMD will be $13,504 ($370,000 divided by 27.4, the factor for an individual age 70 in the Uniform Table).
Observation: In Example (3), the distribution from the qualified plan was made in a year before any RMDs had to be made from the plan. If the distribution had been made in a year when a RMD was required, then the amount of the RMD would have to be subtracted from the total distribution to determine the amount eligible to be rolled over.
Recharacterization of Roth IRA conversions in year after conversion. Suppose all or part of the amount in a traditional IRA is converted to a Roth IRA in a year when the year-end value of the traditional IRA would be used to determine the RMD from the traditional IRA for the following year. If that amount is transferred to a traditional IRA in the following year as a recharacterized contribution, then for purposes of determining the RMD for the following year:
...that amount, plus
...net income allocable to that amount, must be added to the Dec. 31 account balance of the transferee IRA for the year in which the conversion or failed conversion occurred.
Example (4): Your client who was 73 in 2002 took his RMD for 2002 from his traditional IRA on Oct. 15, 2002. Immediately after taking this distribution, he converted the entire balance of $40,000 in the traditional IRA to a Roth IRA. On Feb. 1, 2003, when the value of the Roth IRA was $35,000, he decided he had made a mistake and had the Roth IRA recharacterized as a traditional IRA. For purposes of determining his RMD for 2003 from his traditional IRA, the value of the traditional IRA on Dec. 31, 2002 is treated as $35,000. Thus, his RMD for 2003 is $1,471 ($35,000 divided by 23.8, the factor for an individual age 74 in the Uniform Table).
