Simplified Rules on
IRA and Retirement Plan Distributions
On Jan. 11, 2001, the IRS released proposed
regulations that make sweeping changes to the minimum distribution rules
pertaining to individual retirement accounts and qualified plans. The
new rules are tremendously important, since they will affect everyone
who participates in a qualified retirement plan or owns an IRA.
by Andrew J. Willms &
Jason R. Handal
ince 1987,
the rules governing IRAs and qualified plan ("retirement account")
distributions have been contained largely in proposed regulations that
have been difficult to interpret, and thus the source of much
controversy.
The Proposed Regulations would eliminate much of the complexity
currently surrounding retirement account distributions by 1) making it
easier for account owners to calculate the amount they must withdraw
during life, and 2) delaying the determination of the account's
designated beneficiary for tax purposes until the end of the year
following the year of the account owner's death. Ultimately, the
Proposed Regulations will reduce the amount of required distributions
for the majority of taxpayers.
Effective Date
The
new Proposed Regulations are effective no later than Jan. 1, 2002.
However, IRA owners may, but need not, apply them as of Jan. 1, 2001,
notwithstanding the terms of the IRA documents. Further, plan sponsors
may, but need not, follow the Proposed Regulations by adopting the model
amendment provided in the regulations (as amended after original
issuance in the Federal Register on Jan. 17, 2001) before Dec. 31,
2001.
The IRS already has issued clarification regarding the effective
dates. Specifically, the preamble to the new Proposed Regulations
provides that taxpayers may rely on either the 1987 Proposed Regulations
or on the 2001 Proposed Regulations when determining required minimum
distributions for calendar year 2001. The clarification provides that
for purposes of determining what constitutes a "2001 distribution," a
distribution for calendar year 2001 does not include a distribution that
is required to be made by April 1, 2001, for calendar year 2000, such as
for an account owner/plan participant who attained age 70-1/2 in 2000.
The amount of such a distribution must be determined under the 1987
Proposed Regulations.
What the Regulations Say
The principal provisions of the Proposed Regulations are summarized
as follows:
1) The Proposed Regulations contain a simple, uniform table that can
be used by all account owners when determining the minimum amount that
must be withdrawn annually from the account prior to death. That table
is included at the end of this article.
- Use of the table allows distributions to be based on the joint life
expectancy of the account owner and a hypothetical person who is 10
years younger than the account owner.
- Minimum required distributions are determined without regard to the
beneficiary's actual age (except as provided below).
- The only exception would occur when the required distributions could
be reduced. This would apply only when a spouse who is more than 10
years younger than the account owner is the designated beneficiary. In
this case, the actual joint life expectancy of the account owner and the
spouse can be used. This could benefit the account owner, as it would
allow him or her to slow down the rate of required distributions during
his or her lifetime.
- It no longer will be necessary to decide whether or not to
recalculate life expectancy when determining the amount to be
distributed. This has been a complicated and difficult decision for
account owners.
- The new Proposed Regulations are much simpler, and more favorable,
than their predecessors.
2) The new Proposed Regulations eliminate the requirement that the
designated beneficiary for purposes of minimum distributions be
determined as of the account owner's required beginning date (typically
April 1st of the year after the owner attains age 70-1/2).
- In the past, the life expectancy of the designated beneficiary
determined the rate of distributions from that point forward. A change
of beneficiary after the required beginning date to a younger
beneficiary would not affect the rate of distributions.
- Now, determination of the rate of distributions can be delayed until
Dec. 31 of the year following the account owner's death.
- In most cases, the beneficiary's life expectancy will determine the
rate of distributions after the account owner's death. This makes sense;
however, the prior rules were quite complicated as to determining the
rate of post-death distributions.
- A change during life and after the required beginning date to a
beneficiary with a shorter life expectancy, or no life expectancy (that
is, a charity), will not increase the rate of lifetime distributions, as
was the case under the prior regulations.
- A change of beneficiary after the required beginning date now will
be effective to promote a "stretch-out" of distributions after the
account owner's death.
- The later determination date offers additional post-death planning
opportunities through the use of qualified disclaimers.
3) The date the rules take effect depends upon the circumstances.
- For a participant in a 401(k), profit sharing plan, or other type of
qualified plan, the new rules will take effect no later than 2002,
although the plan sponsor (that is, employer) may allow retirees to
begin using the new rules in 2001.
- An IRA account owner can use the new rules to determine the required
distribution amount for 2001.
- If an individual turned 70-1/2 last year and has waited until this
year to receive his or her minimum distribution for 2000, then the old
rules must be used for that distribution, but the new rules can be used
for the 2001 distribution.
- In the case of an individual who has inherited an IRA or retirement
plan from a person who died before 2000, it is not entirely clear how
much the beneficiary is required to withdraw.
4) The Proposed Regulations also change the rate of distributions
following the account owner's death if there was no designated
beneficiary.
- If the account owner dies before his or her required beginning date
and there is no designated beneficiary as of the end of the year
following death, then the entire plan balance must be distributed by
Dec. 31 of the year containing the fifth anniversary of the account
owner's death. This is consistent with the prior rules.
- If the account owner dies after his or her required beginning date
and there is no designated beneficiary as of the end of the year
following death, then the person(s) receiving the account can consider
the account owner's remaining life expectancy at the time of death,
which might allow for greater deferral of distributions to the
beneficiary(ies).
5) Where a trust is the designated beneficiary, the requirement that
a copy of the trust document be provided to the "plan administrator"
before the required beginning date is eliminated, subject to certain
limited exceptions.
Estate Planning Implications
These changes will significantly affect estate
planning for retirement accounts. Some of the possible ramifications of
the new Proposed Regulations include:
1) There is no need to decide whether to recalculate life
expectancies.
2) If a spouse who is named as the primary beneficiary of a
retirement account dies first, the account owner simply can change the
designated beneficiary, and the new beneficiary's life expectancy will
determine the rate of minimum distributions after the account owner's
death, even if the change occurs after the account owner's required
beginning date.
3) As a result of #2 above, second-to-die life insurance will be a
much more feasible way to pay estate taxes on retirement accounts.
4) If the designated beneficiary makes a qualified disclaimer (that
is, rejection of ownership) of account benefits, and as a result the
benefits pass to a person with a longer life expectancy, then the longer
life expectancy can be used when determining the rate of distributions
after the account owner's death. As a result, it will be important to
draft beneficiary designations that include younger persons (such as
grandchildren) as alternate beneficiaries.
What Account Owners Should Do
1) If an account owner is over age 70-1/2 and therefore is receiving
minimum distributions, then:
- He or she should not take his or her minimum required distribution
for 2001 until he or she is certain the new table is being applied. This
will, in most cases, ensure the distribution is no larger than
required.
- Remember, the account owner can always withdraw more than the
required amount. In most cases, of course, the account owner will have
to pay income tax on such a withdrawal.
- Account owners should review their current beneficiary designations
to ensure they are taking advantage of the new proposed rules. The
simpler, more lenient rules have created opportunities to ensure that
the tax-deferred funds continue to be tax-deferred for as long as
possible after death.
Andrew J. Willms, University of Miami 1984 cum
laude, LL.M.-Estate Planning 1985, is the founding shareholder of Willms
Anderson S.C., Thiensville. His practice emphasizes estate and
retirement planning, probate, and corporate law. He is a frequent author
and speaker on estate planning and related topics.
 Jason R. Handal, Marquette 1995, is a
shareholder with the firm, limiting his practice to estate and
retirement planning, probate and trust administration, and corporate and
tax law. He also is a frequent speaker on estate planning topics.
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2) Because the required distribution will be
lower, this could reduce certain individuals' 2001 adjusted gross income
to less than $100,000, thereby making him or her eligible to convert a
traditional IRA to a Roth IRA, if he or she is otherwise interested in
doing so.
3) In the case of an inherited IRA or retirement account from a
person who died during 2000 or before, consider delaying the 2001
distribution until the impact of the new rules has been clarified.
Conclusion
While questions remain and further guidance is expected, the new
Proposed Regulations will simplify distribution planning from retirement
accounts as well as increase an account owner's ability to defer the
income tax liability attributable to such accounts. Further, the
Regulations, in most cases, will allow beneficiaries to withdraw the
funds more slowly after the account owner's death. As a result, all
account owners should review their beneficiary designations to ensure
they are taking advantage of the newly proposed rules.
To view the entire text of the Proposed Regulations (and subsequent
IRS clarifications), visit the "estate planning in depth" section of www.estatecounselors.com.
Wisconsin Lawyer
