IRS Issues New Rules on Minimum Distributions From IRA’s
By Robert J. Saalfeld
SAALFELD GRIGGS PC
The IRS recently issued new rules on distributions from IRA’s and qualified retirement plans. The new regulations not only simplify the distribution rules, but also reduce the required minimum distributions for the vast majority of individuals. This means more of your IRA or plan money can continue to grow income tax deferred.
The new rules provide that almost everyone will use the same uniform table to determine their minimum distributions that begin at age 70 ½. This new table is based on the most beneficial distribution schedule that was available under the old rules. According to the new table, your distributions are determined by your life expectancy and the life expectancy of someone who is deemed 10 years younger than you. There is one favorable exception: If your beneficiary is your spouse who is more than 10 years younger than you, you can use the actual joint life expectancy.
The required distributions under the new table start at only about 4% of your account balance. If you only take the minimum required distributions, you will not have to tap principal until later years when the required distributions increase. For instance, an IRA owner earning 7% will not have to tap principal until about age 85. Many people will have more value in their accounts at their death than they did at age 70½. Also, under the old and new rules you can always take more than your required minimum distributions.
In addition to allowing more tax deferred growth for account owners, the new rules also give an important benefit to your children as beneficiaries. Under the new rules, the beneficiary is not finally determined until December 31 following the year of your death. If you have named your children as beneficiaries, your children after your death can separate the IRA into separate IRA’s for each child by the December 31 deadline. Each child can then stretch out the distributions over his or her own life expectancy, thus achieving maximum tax deferral. This was not clearly allowed under the old rules for people who died after 70 ½ and the IRA had not been divided into separate accounts before then.
Also, if a child is the beneficiary and a grandchild is the contingent beneficiary, the child can disclaim the benefits by the December 31 deadline and the grandchild can stretch the distributions out over the grandchild’s life expectancy. Finally, if a charity is named as a co-beneficiary with the children, the charity can now be paid by the December 31 deadline. This allows children to be the only designated beneficiaries. The children can take the distributions over the life expectancy of the oldest child, or over each child’s life if the account is separated by the December 31 deadline. Naming a charity as a co-beneficiary under the old rules was a trap that shortened the deferral period for the children.
The new rules also allow you to change your beneficiary at any time. Under the old rules, changing your beneficiary could lead to having to take larger distributions. Now changing your beneficiary will not affect your distributions.
The important immediate planning impact of the new rules is two fold. First, any person who has reached 70½ by year 2000, or who will reach it in 2001 should check the new rules before taking his or her required distributions for 2001. You can have significantly more deferral by using the new table. (Year 2000 IRA distributions deferred to April 1, 2001 must be based on the prior regulations, however). Second, you can now review your designated beneficiaries and make any changes without affecting the distributions you will receive during your life.
In summary, the new rules allow more tax deferral opportunities for account owners and beneficiaries.