New IRA Distribution Rules
Updated: Nov 3, 2021
In a surprise turnaround, the IRS has recently issued proposed regulations substantially simplifying the rules for calculating required minimum distributions from individuals’ retirement plans. Historically, determining how to calculate minimum required distributions has confused and perplexed many individuals entitled to receive qualified retirement benefits. The rules have been less than clear and have been in proposed form for more than 14 years. The penalties for noncompliance have resulted in the loss of tax deferral for the entire retirement plan as well as significant penalties. The revised proposed regulations are designed to simplify the 1987 proposed regulations by: Providing a uniform table from which to calculate required distributions;Allowing redistributions to be calculated without regard to the beneficiary’s age;Permitting the beneficiary to be determined as late as the end of the year following the year of death; and Allowing post-death distributions to be spread over the beneficiary’s remaining life expectancy. The new rules take effect for calendar years beginning on or after January 1st, 2002. However, taxpayers may rely on the revised proposed regulations or the 1987 proposed regulations for distributions beginning January 1, 2001. In essence, the IRS is allowing taxpayers the opportunity of using the new rules immediately. The new rules will allow individuals to withdraw less than the old rules. As an example, someone aged 71 with $250,000 in an IRA would be required under the old rules to take a minimum withdrawal of about $16,300. Under the new rules they are required to take about $9,800, thus significantly reducing the required minimum distribution (RMD). This could result in a tax savings of over $2,500 per year. The old rules let retirees choose among seven complicated methods to calculate the RMD, and, once chosen the particular method would be set in stone. The new method requires retirees to consult a single table known as the Minimum Distribution Incidental Benefit Divisor Table. This table is used for almost all participants regardless of whom the participant names as his or her beneficiary. The one exception to this much-simplified rule is where the participant names a spouse more than 10 years younger than the participant as sole beneficiary. Under these circumstances, lifetime distributions are based upon a joint and last survivor life expectancy. The new proposed regulations also simplify distributions to beneficiaries after a participant’s death. Depending upon who is determined to be the designated beneficiary as of December 31st of the year following the year of death: Nonspouse: Remaining life expectancy of designated beneficiary as of the year following participant’s death.Spouse: Spouse’s single life expectancy during spouse’s life. Year after spouse’s death, spouse’s life expectancy in year reduced by one year each subsequent year.No designated beneficiary: Participant’s life expectancy in year of death, reduced by one year each subsequent year or five-year rule (new proposed regulations are unclear on this point). Many of these changes are viewed as positive from an estate planning point of view. Under the old regulations once you chose a particular calculation formula and a death beneficiary, you were locked into those choices for your lifetime once you began taking distributions. Under the new regulations, you can change beneficiaries whenever you wish, including those beneficiaries named even if you are currently taking minimum distributions under the old regulations. It appears that the IRS has done this in an effort to help get a handle on the reporting of distributions. Under the old rules there wasn’t any mechanism for tracking whether participants were taking their minimum required distributions. However, this has been addressed under the new rules. The new rules require sponsors and custodians to report to the IRS and the participant the amount of the minimum required distribution taken each year. This will alert the IRS to those participants not taking their RMDs, thereby allowing the IRS to assess against the participant or beneficiary the hefty 50% penalty associated with withdrawing less than the minimum. The new proposed regulations simplify many of the rules that have so often wreaked havoc on retirees on retirement distributions. They provide unique planning opportunities that shouldn’t be overlooked. However, some of the technicalities associated with dealing with these assets remain, especially when a trust is involved.