Tax Tips
New Rules Simplify Retirement Account Distributions - September 2001
Richard Scrivanich - Partner
The IRS has recently released a new set of proposed regulations that makes the minimum distribution rules for retirement accounts a little easier to follow. The new rules simplify how to determine a distribution period, ease restrictions on when beneficiaries must be designated, and clarify the rules for a surviving spouse who inherits an IRA. The new rules apply to required minimum distributions from qualified plans, individual retirement plans (IRAs), deferred compensation plans under section 457, annuity contracts under section 403(b), custodial accounts, and retirement income accounts.
These newly proposed regulations replace previous proposed regulations, and can be used until the final regulations are issued. The new rules are effective for distributions for calendar years beginning on or after January 1, 2002. For distributions for the 2001 calendar year, IRA owners are permitted, but not required, to follow the proposed regulations.
Uniform distribution table.
The new proposed regulations have a uniform table for calculating minimum distributions, so taxpayers don't have to recalculate benefits annually. The table is easy to use; a taxpayer plugs in his or her birth date and most recent annual account balance, and in most cases the amount of the minimum distribution will be lower than under the old method and the payout periods will be longer. These changes mean that individuals can leave more money in their accounts and postpone taxation.
Designated beneficiaries.
Under the old regulations, an account owner had to name a beneficiary by the required beginning distribution date or date of death, in order, to retain all distribution options. The new regulations fix the time for designating a beneficiary at the end of the year following the account owner's death. This allows a taxpayer to change beneficiaries without affecting his or her minimum required distribution and permits post-death changes due to disclaimers issued by the beneficiaries. This is a significant change: previously, once an individual starting receiving distributions, the beneficiary-or default beneficiary-was locked in and could not be changed.
No beneficiary named.
If an account owner dies without a beneficiary, the new regulations allow a designated beneficiary to be named by December 31 of the year after the account owner's death. Distributions will be made according to the designated beneficiary's life expectancy. This provides a helpful estate-planning tool: previously, if no beneficiary had been named, the account balance would have been subject to both estate and income tax. Now, if a beneficiary is designated after the owner's death, estate tax must still be paid, but income tax will be due only as the account is distributed to the beneficiary.
If the account without a designated beneficiary is an employee account, the new rules eliminate the requirement that the employee's entire remaining account must be distributed in the year after death. Instead, a distribution period equal to the employee's remaining life expectancy recalculated immediately before death will allow benefits to be paid out over a number of years after the death.
Default rule replaced.
The current regulations state that in the event an account owner dies before reaching the required distribution beginning date, all benefits must be paid to a nonspouse beneficiary within five years. The proposed regulations provide for a distribution over the life expectancy of the beneficiary (in all cases where there is a designated beneficiary).
Surviving spouse rules.
The new regulations also clarify how a surviving spouse and an inherited IRA should be treated. The proposed rules state that a spouse will be considered as having elected to be treated as the owner of the inherited IRA, only if he or she is the sole beneficiary, and has the right to unrestricted withdrawal from the account. In addition, the election will be deemed to have been made only after the distribution of any minimum required amount for the year of the account owner's death.
Annuity payments.
Under the new regulations, the distribution period for annuity payments will now be determined using the life of the beneficiary, calculated by the starting date of the annuity, regardless of whether that date is after the account owner's required beginning date.
Ability to disclaim.
The new regulations also permit a beneficiary to disclaim the right to collect benefits at any time before December 31 of the year after the participant's death. This would allow a contingent beneficiary to collect the benefit. This ability to disclaim will give greater flexibility when doing estate planning. For example, an account owner can name a spouse as the primary beneficiary and his or her children or grandchildren as contingent beneficiaries. The spouse may later find that he or she does not need the account proceeds for support, can disclaim, and pass the proceeds on to the children or grandchildren.
If you have any questions concerning the new IRA distribution rules, or any other accounting or business matter, please feel free to give me a call at (562) 698-9891.
Return to Tax Tips Archives
All rights reserved. For personal use only.
Do not duplicate or distribute without permission. All information in this
article is for informational purposes only.
Some of the articles included here were written in a prior
year or before a current tax law change. Therefore some of the information in
the older articles may not still be valid. Any dollar thresholds indicated
relate only to the year for which the article was written and could be different
for the current year. Please discuss with us your personal situation before
acting on any of the information provided. If you have any questions,
please give us a call at (562) 698-9891.
|
