New IRA/Pension Distribution Rules More Generous To Taxpayers
IRS, in proposed regulations issued January 15, 2001, has proposed new rules for distributions from IRAs and pension plans. In general, the proposed rules are much more generous to taxpayers than existing rules. The effective date is January 1, 2001.
Some of the highlights are:
Most taxpayers will determine their "minimum distribution requirement" (what must be withdrawn, beginning after age 70½, to avoid penalties) using a single table. Unless the designated death beneficiary is a spouse who is more than 10 years younger, this table will apply in all circumstances.
This new table substantially reduces the minimum distribution requirement for most persons. That translates into more money which can be left in the IRA or pension, deferring income taxes and generating earnings on the deferred taxes. (Of course, the IRA owner can always choose to withdraw more than the minimum if funds are needed.)
Beneficiaries need not be selected by age 70½, and beneficiaries can be changed without adversely affecting minimum distribution requirements. Because the table applies to everyone (excepting a taxpayer with a spouse more than 10 years younger), failing to have a designated beneficiary will not affect the owner's minimum distribution requirement, and changing beneficiaries will not increase that requirement. The need under the old rules to irrevocably elect by age 70½ to recalculate life expectancies or not is no longer an issue.
Post-death distribution rules no longer depend upon whether death was before or after the "required beginning date." Heirs will calculate their minimum distribution requirements using their individual life expectancies. Use of the eldest life is required only if separate accounts for each of several beneficiaries have not been established by the end of the year after the year of death. The beneficiary is to be determined at the end of the year after the owner's death, making it possible to change beneficiary by disclaimer. However, if no beneficiary has been designated by the end of the year after the year of owner's death, the account must be drawn down and subjected to income tax within five years. For trusts named as beneficiaries, the old rules required certain documentation to be supplied to Trustees or custodians by age 70½; now documentation need not be supplied until the end of the year after the year of death. This makes the use of a trust as a beneficiary much more flexible.
Trustees and custodians of IRAs and plans will now be required to inform IRS of minimum distribution requirements, so taxpayers must be careful to comply with minimum distribution requirements in order to avoid substantial penalties for under?distributions.
The changes will affect virtually everyone, and favorably in almost all cases. Persons taking required minimum distributions will want to look at the new tables. Everyone should review his/her beneficiary designations. Naming a trust or other person as a beneficiary may make sense now. Please note that the specific provisions of IRA contracts or pension plans may be more restrictive than IRS requirements, particularly until IRA custodians and plan sponsors adopt necessary amendments to reflect these new proposed regulations. Plan documents are frequently a problem, restricting choices. It is also quite common that beneficiary designation forms may not allow sufficient room to list all of your children, may not allow the share of a deceased beneficiary to pass to that person's descendants, or may not be flexible enough for trust beneficiaries or to permit disclaimers. Bank reorganizations have sometimes resulted in loss of beneficiary designation records. For all of these reasons, this is a good time to review your death beneficiary designation for your IRAs or pension plan.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.