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New Rules About Required Minimum Distributions

Proposed Regulations Make Required Minimum Distribution Rules More User-Friendly  

A new set of rules proposed by the IRS would substantially liberalize, relax and simplify the often complex and unfriendly tasks associated with determining to whom, how much, and for how long retirement account benefits should be distributed once an account owner reaches his or her required minimum distribution date.

Uniform distribution period

The proposed regs, by supplying a uniform table for minimum distribution calculations, eliminate the need for taxpayers to determine, by their required beginning dates, who their designated beneficiaries will be or whether they wish to recalculate benefits annually.  In addition, the incidental death benefit rule becomes irrelevant.  Where the designated beneficiary is a spouse more than 10 years younger than the account owner, however, the regs still permit a longer payout period.

      Comment.  The table is easy to use:  an individual merely plugs in his or her birth date and his or her most recent annual account balance.  Not only will the new regs simplify calculation, the amount of minimum required distributions will be reduced for most retirement account owners.

Designated beneficiaries

Although regulations currently require an account owner to designate a beneficiary by his required beginning date or death in order to retain all distribution options, the proposed regulations would fix the time for determining the identity of the designated beneficiary at the end of the year following the account owner’s death.  This permits a taxpayer to change beneficiaries without affecting his or her minimum required distribution and permits post-death changes in beneficiaries via disclaimers.

5-year default rule replaced

In the event an account owner dies before reaching the required beginning date, the current default rule requires payment of all benefits to a nonspouse beneficiary within five years.  The proposed regs would provide instead for distribution over the life expectancy of the beneficiary in all cases where there is a designated beneficiary.

Annuity payments

The new regs provide that the distribution period for annuity payments will be determined using the life of the beneficiary calculated as of the annuity starting date, regardless of whether that date is after the account owner’s required beginning date.  In the case of an annuity that does begin on the required beginning date, only accruals as of the close of the previous year need be considered in calculating the amount of the benefit payments.  Subsequent accruals must be taken into account in determining the monthly payments for the next year, but any necessary make-up payments don’t have to be made until the end of the year.

QDROs

Under the proposed regs, the former spouse of the account owner is treated as a spouse for distribution purposes.  Required minimum distributions to an alternate payee whose benefits are allocated to a separate account within a retirement account must begin by the account owner’s required beginning date.  The minimum distribution amounts are calculated separately, however.

Surviving spouse rules

Clarifying the rules of governing a surviving spouse’s treatment of an inherited IRA, the new regs propose that a spouse will be deemed to have elected to be treated as the owner of an inherited IRA only if he or she is the only beneficiary and has the right to unrestricted withdrawal from the account.  Further, the election will be deemed to have been made only after distribution of any minimum required amount for the year of the account owner’s death.

Effective dates

Included in the proposed regs is a model amendment that plan sponsors may use to adopt the new rules before final regs are issued.  Although the proposed regs would be effective for purposes of determining minimum distributions required for calendar years starting with 2002, taxpayers may use either the new regs or the proposed regs issued in 1987 to determine distributions for 2001.

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