Tax & Business Insights

More IRA Options – New IRS Rules

Volume 13 Issue 4 --  July/August 2001

The IRS has justifiably received much praise for the new regulations on IRA distributions that were released earlier this year. While billed as “simpler” than the previous rules, the new rules aren’t exactly light reading. 

Nevertheless, there are a few key aspects of the new rules that every practitioner should know.

The proposed new rules significantly alter, among other components of the IRA regime:

1.  the rules for computing the minimum required  distributions (RMDs) from the IRA;

2.  the rules relating to the designation of beneficiaries;

3.  the rules governing the consequences of beneficiary designation on the minimum distribution requirements.

Beginning with distributions for 2001, the distribution requirements are keyed to a uniform life expectancy table rather than to the individual life expectancies of the IRA owner or beneficiary.  In most cases, the use of the uniform table will reduce the minimum distribution requirement for most owners and beneficiaries.

Happily, it will no longer be necessary to deal with the question of recalculating life expectancies each year. The uniform table makes recalculation unnecessary.

For example, suppose an IRA owner under the old rules had an IRA worth $100,000 on December 31, 1999, and had no designated beneficiary as of the Required Beginning Date (RBD). For the first year of distributions, when the owner was 71, the RMD would have been $6,536 ($100,000 divided by a life expectancy of 15.3.  Under the new rules, the minimum distribution in year 2001, assuming the same account value, would be $3,953 ($100,000 divided by 25.3, the “life expectancy” value under the uniform table).  Under the new rules, it makes no difference whether a beneficiary had been designated.

There is one significant exception to the uniform, simplified approach to computing required distributions.  If the IRA owner’s spouse is more than 10 years younger than the IRA owner and is the sole beneficiary of the IRA, the required distribution may be computed using the actual joint life expectancy of the IRA owner and the spouse, usually resulting in lower minimum distributions than even the uniform table.

From a planning perspective, one of the most significant effects of the new proposed rules is the change in the time at which the designated beneficiary is determined.  Under the newly proposed rules, the designated beneficiary is determined as of the end of the year following the death of the IRA owner. Therefore beneficiary designations can be changed up to the date of death.

Importantly, for IRA owners over age 70½ who failed to designate a beneficiary prior to reaching age 70½, they now have a chance to correct that oversight.  Moreover, certain post-death events, such as disclaimers, will now be taken into account in determining the designated beneficiary.

In a nutshell, the new distribution rules, subject to various exceptions and qualifications, are:

Distributions must begin as of the RBD (as under the old rules), but the RMD is determined based on the IRA owner’s life expectancy under a uniform table.

If the IRA owner dies and there is a designated beneficiary (as of the end of the year after death), distributions must occur over the life expectancy of the beneficiary.

If the IRA owner dies without a designated beneficiary, the required distributions depend upon whether death occurs before or after the RBD.  If death occurs before the RBD, the IRA must be distributed within 5 years.  If the death occurs after the RBD, distributions must take place over the remaining life expectancy of the IRA owner immediately before his or her death.

While keeping some of the provisions of the old rules on the rights of a surviving spouse to treat the IRA as his or her own, the new rules do make several important clarifications and modifications. Under the new rules, it now appears that if a trust is a beneficiary, even if the surviving spouse is the sole beneficiary of that trust, this may prevent the spouse from making this election.

For a much more detailed discussion of the new rules and the planning possibilities under them, Click Here, or give us a call.

Copyright 2001
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