New IRA Forms and RMD Regulations Finalized


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New IRA Forms and RMD Regulations Finalized
BOL Guru Ken Golliher

Compliance personnel, please e-mail this article to your IRA administrators, it may be the first "thank - you" you get today.

"Change is in the air" is an understatement for IRA administrators. Two long awaited recent developments will consume much of their time in the next few months.

Revisions to Model Forms
Changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) had dramatic, positive effects on Individual Retirement Accounts. Those changes require substantial alterations of the language used in IRA agreements. Most fiduciaries buy their forms from vendors. However, most vendors base their documents on a series of model forms developed by the IRS - vendors could not revise their forms until the IRS revised its models.

The IRS recently revised its model forms for the Traditional, Roth and Coverdell (education) IRAs. All now carry a revision date of March, 2002. (Links to each can be found at Change is in the Air.) Now, it is the custodian or trustee's responsibility to 1) begin using the revised forms to open accounts and 2) provide documents with the revised language to existing account holders.

IRS Announcement 2002-49 indicates that fiduciaries may use existing IRA forms to open IRAs through October 1, 2002. However, continuing to use old forms is counterproductive. All IRA holders whose accounts were opened using the old forms must eventually receive revised documents. Thus, the longer fiduciaries continue to use the old forms to open accounts, the longer the list of customers to whom they must send the revised forms. For example, if a financial institution begins using the new forms to open IRAs on June 1, it only has an obligation to mail revisions to all of those who held IRAs as of May 31.

The mailing to existing IRA holders can be done any time during 2002. It is not necessary for those customers to "agree" to the changes by executing a new plan.

There is no requirement that the mailing be "dedicated," it can be combined with other mailings, other than those of information returns; e.g. the Form 5498. Also, the financial institution may choose between sending a new plan and plain language disclosure or it may simply send amendments to each of those documents. A fiduciary choosing to send complete plans and disclosures is not specifically required to draw the areas of change to the taxpayers' attention.

However, since the changes to IRAs are positive and the mailing is already a sunk cost, the mailing is an opportunity to explain the critical changes in a cover letter and encourage customers to take advantage of the new contribution amounts, etc.

Final RMD Regulations
On April 17, 2002 the IRS published final regulations on the calculation of required minimum distributions (RMD's) from a variety of tax-deferred plans, including IRAs. They finalize proposed regulations issued in January 2001 and, thus, replace regulations issued in 1987.

Minimum distributions are required of IRA participants over 70 � and beneficiaries of inherited IRAs. They are calculated using a variety of alternative methods under the 1987 regulations. Some interpreted those requirements as necessitating an "election" by the customer and bankers oftentimes made elaborate presentations to customers on their payout alternatives. (They were generally assured that they had fully explained those options when the customers' eyes were glazed and they appeared to be semi-catatonic.) The final regulations eliminate the need for running the customer through a gauntlet of indecipherable alternatives. If the fiduciary already has the appropriate information on the IRA owner and the beneficiary, the RMD can be calculated and the customer simply informed of the amount.

Some of the major points from the final regulations:

RMDs during the lifetime of the participant are calculated using a joint life expectancy table, which assumes the beneficiary is 10 years younger than the participant. This eliminates the effect that the beneficiary's age sometimes had on the calculation; it generally homogenizes the RMD calculation for participants of the same age. (If the beneficiary is the participant's spouse and he or she is more than 10 years younger than the participant, their actual joint life expectancy can be used.)
The new regulations are accompanied by new mortality tables reflecting increased longevity. Use of the new tables reduces the RMD because it slightly increases the applicable divisor used in RMD calculations:

Life expectancy	Old Table	New Table
Individual, age 70	16.0	17.0
Joint and last survivor, participant age 70 and beneficiary age 60	26.2	27.4
Joint and last survivor, participant age 70 and spousal beneficiary age 50	34.0	35.1

Designated beneficiaries are determined as of the account's terms on September 30 of the year following the participant's date of death. (The proposed regulation used December 31 of the year following the date of death.) This facilitates the division of the IRA into separate accounts for each beneficiary as well as disclaimers by the first tier beneficiaries.
If an IRA participant dies before the date when RMD's are necessary, the beneficiary's RMD is calculated based on the beneficiary's life expectancy. (The 1987 rules indicated the beneficiary had to withdraw the funds within 5 years unless he or she made a timely election choosing their life expectancy as the pay out period. Now the 5 year rule applies only if there is no individual beneficiary.)
If an IRA participant dies after the date when RMD's are required, the beneficiary's RMD is calculated based on the longer of the beneficiary's life expectancy or the remaining pay out period for the participant.
When a trust is the IRA beneficiary and certain, specific documentation is provided to the custodian, then one of the trust's beneficiaries can be used as the IRA beneficiary for the purposes of calculating the RMD.
IRS plans to require that fiduciaries include the amount of the RMD on information returns are essentially on hold. However, it may be required in the future. As fallback position, the fiduciary is required to annually notify IRA participants, but not the IRS, of the RMD for their accounts.

Use of the revised RMD calculations is not required until 2003. For 2002 and prior years an RMD calculated using the 1987 regulations, the regulations proposed in 2001 or the final regulations discussed here is acceptable. However, generally both the consumer and the fiduciary want the amount withdrawn to be as small as possible. Calculations based on the 2002 final regulations generally yield the smallest dollar figure and have the advantage of being the simplest calculation method.

With publication of the revised forms and the final RMD regulations, IRA custodians are now in a position to plan their administrative tasks for 2002. We suggest they begin using the new IRA documents as soon as possible and mail the revisions to existing customers (including a marketing piece) as soon as possible after that. On the RMD calculations, consider doing the calculations for 2002 using the new rules and then writing to customers. Tell them of the change, the amount of their RMD for 2002 and how you expect to distribute it to them, including the fact that you will impose 10% withholding unless they give you instructions to the contrary. Let your letter establish a framework of "automatic" decisions and, if you wish, indicate which elements the customer can alter.

While implementation may be time consuming, the underlying changes are all positive for your institution and your customers.

First published on BankersOnline.com 04/29/02

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