New IRA Required Minimum Distribution Calculation Rules
by Larry Parman Guru bios
QUESTION: I need information on the new IRA required minimum distribution calculation rules! I understand that they are not mandatory until 2002, but our customers may use it for 2001 distributions.
ANSWER: The Department of Treasury has changed the longstanding rules dealing with Minimum Required Distributions from IRAs and qualified retirement plans. The new rules are retroactive to January 1, 2001.
Minimum Required Distributions refers to the amount that an IRA owner is required to withdraw from his IRA or qualified plan annually once he reaches his required beginning date. The IRS will charge a 50 percent penalty on the shortfall if the IRA owner fails to withdraw his distributions.
Determining the beneficiary
Probably the most significant change made by the new rules deals with when a designated beneficiary must be determined. The old rules said the IRA owner had to determine a designated beneficiary by his required beginning date. That date is April 1 of the year he reaches age 70 1/2.
The new rules say a beneficiary can be determined as late as December 31 of the year after the owner's death. So, the beneficiary can be changed at any time without causing a change to the minimum required distributions.
Also, any beneficiaries eliminated (through a disclaimer, for example) between the date of the owner's death and the end of the year after his death will be disregarded when determining the minimum required distributions of the remaining beneficiaries.
So, within a year after the owner's death, a distribution can go to a charity or to the owner's spouse. That will not stop any other beneficiaries from taking their minimum required distributions based on their remaining life expectancy.
Further simplifying matters, this new rule means that there are no longer different distribution rules for beneficiaries based on whether the owner dies before or after his required beginning date.
Calculating distributions
Under the old rules, when determining an IRA owner's minimum required distributions, he was faced with the choice of recalculating his life expectancy, his spouse's life expectancy, or both.
The new rules don't consider those factors. Instead, a uniform lifetime distribution table is used for almost all participants, regardless of who is named as the beneficiary.
The exception to this rule is if the sole beneficiary of the IRA or retirement plan is a spouse who is more than 10 years younger than the owner. In that case, lifetime distributions are based upon the couple's actual joint life expectancy.
Distributions after death
The new rules also attempt to simplify rules for distributions to the beneficiaries after the IRA owner's death. Specifically, they provide some default rules, depending on who is determined to be the designed beneficiary as of December 31 of the year after the owner's death:
For nonspouses -- the remaining life expectancy of the designated beneficiary as of the year after death.
For a spouse -- the spouse's single life expectancy.
When there is no designated beneficiary -- the retirement plan owner's remaining calculated life expectancy in the year of death.
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