by Scott E. Vincent
Shughart, Thomson & Kilroy
Kansas City
Most retirement plans and IRAs are subject to very complex required minimum distribution ("RMD") rules that force participants to withdraw funds from these programs and pay income taxes on the distributed amounts. The Treasury Department recently issued proposed regulations that simplify the RMD rules and allow more effective distribution and post-mortem planning for retirement funds.
Required Minimum Distribution Rules - Background
The RMD rules apply to most retirement programs, including qualified retirement plans, IRAs, Roth IRAs, retirement annuities, certain annuity contracts, certain deferred compensation plans, custodial accounts and retirement income accounts (collectively "qualified retirement programs"). These programs all involve some tax-exempt benefits for retirement funds. The RMD rules basically provide a cutoff point beyond which the retirement funds must be withdrawn as taxable income. Significant excise tax penalties apply if the RMD rules are not followed.
More specifically, the RMD rules require that the entire interest of a participant in a qualified retirement program must be distributed over some combination of the lives of the participant and a designated beneficiary. These distributions must begin no later than the participant's "required beginning date." For most retirement plan participants, the beginning date for distributions is April 1 of the year following the calendar year in which the participant reaches age 70 ½ or retires, whichever is later. For IRA owners and participants owning five percent of the business sponsoring their retirement plan, distributions must begin the April 1 following the calendar year in which the participant reaches age 70 ½, regardless of whether the participant has retired.
Prior regulations set forth an extremely complex system for determining the period over which retirement funds had to be withdrawn from the retirement program in question. These regulations had a variety of limitations and, unfortunately, forced participants to make difficult decisions at the time of their required beginning date that could bind them in the future regardless of changes in their circumstances. There have been complaints about this complex system for many years, and the IRS has finally attempted to simplify the regulations.
New Required Minimum Distribution Regulations
The new proposed regulations substantially simplify the rules for determining RMDs in several respects, including the following:
1. Simplified Uniform Table. A uniform table is provided to determine required minimum distributions during a participant's life. The uniform table eliminates the need to determine beneficiaries by the required beginning date, and also eliminates the need to decide whether or not to re-calculate life expectancy in determining distribution amounts. It also eliminates the need to satisfy a separate incidental death benefit rule.
2. Determination of Beneficiary. Beneficiaries in the case of a death may be determined at the end of the year following the participant's death. This allows participants to change beneficiaries after the required beginning date without changing (usually increasing) required distribution amounts. It also allows a change of beneficiary after death, which can be an important estate planning benefit.
3. Post-Death Distributions. Calculation of post-death minimum distributions can now utilize the decedent's remaining life expectancy at death if there is no designated beneficiary. This allows distributions to be spread over a number of years after death in all cases. It also eliminates the rule requiring distribution of an entire account balance in the year after death for participants who have been recalculating life expectancies and die without a designated beneficiary.
4. Charitable Beneficiaries. Charities may now be named as a beneficiary without changing the minimum distribution calculation. This provides more flexibility and encourages charitable giving.
5. Custodial Reporting. Custodians of qualified plans and IRAs are now required to calculate the RMD for participants after the required beginning date and report this information to them each year. While placing a burden on custodians, this rule will help provide individual participants with assistance in determining required minimum distributions.
Effective Dates
The newly proposed regulations take effect for all participants beginning January 1, 2002. For distributions in the year 2001, qualified plan sponsors have the option of following the old rules or the new rules. Similarly, IRA owners have the option to follow the old rules or the new rules for year 2001 distributions.
Conclusion
The new proposed regulations for required minimum distributions significantly simplify planning and administration of qualified retirement program withdrawals. These new rules also provide more flexibility in distribution and post-mortem planning for qualified plan and IRA interests. For the year 2001, distribution planning should consider both the old and new rules to minimize required distributions.