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GOVERNMENT EASES RULES ON INDIVIDUAL
RETIREMENT ACCOUNT DISTRIBUTIONS

Written By: James P. Robinson, C.P.A.
Published By:                                             
Date: __________ ___, 2002

Those of you in the construction industry who are planning for retirement might be familiar with the financial advantages surrounding individual retirement accounts (IRAs), 401K plans, and 403(b) tax-sheltered annuities. However, you might not be aware of the mechanics involved in taking the money out as it pertains to required minimum distribution (RMDs).
Taxpayers often fail to realize and are surprised to discover that, upon reaching age 701/2,they generally are required to begin taking an amount annually from their retirement account and include that distribution in their taxable income. Generally for qualifying plans and IRAs, the start date for RMD is April 1following the calendar year that you reach 701/2. Prior to newly issued regulations, distributions from retirement accounts were subject to sophisticated calculations necessary to determine the required minimum distributions. The distribution amount had been based on actuarial tables of life expectancy; whether a designated beneficiary or beneficiaries existed on your required beginning date of distribution and whether or not you elected to recalculate life expectancy annually.

USER-FRIENDLY IRS

In an effort to become more user-friendly, the IRS has made it easier to understand and apply retirement plan minimum distribution rules. The proposed 201 regulations significantly simplify the rules applicable to defined contribution and other individual account plans, including IRAs. The new rules are applicable for calendars beginning on or after January 1, 2002, although you might rely on them for 2001.

The new rules provide a uniform simplified table for determining the distribution period or number of years that the lifetime distributions will be paid. The account balance as of the close of business on December 31 of the proceeding calendar year is the basis or amount used to determine RMD from an IRA for a given year.

For example, Peter reaches age 701/2 in 2002. His required start date is April 1, 2003. The balance in Peter’s IRA is $126,500. Using the Table for Determining Applicable Divisor for Minimum Distribution Incidental Benefits (MDIB TABLE), Peter must divide his account balance of $126,500 by 25.3 (the divisor in the table next to his age of 71). The RMD for 2002 is $5,000 ($126,500/25.3). Peter’s IRA balance on Dec. 31, 2002, is $106,000.

In order to determine the RMD for the second distribution calendar year, this amount will be reduced by $5,000 for the distribution made on April 1, 2003, for the 2002calendar year. Therefore,$2101,000 is the amount used to determine the RMD for 2003, the second calendar year.

In the example above and in general, the RMD is not affected by the beneficiary’s age unless the spouse is the sole beneficiary, and is more than 10 years younger than the taxpayer. In that case, the applicable account balance is divided by the join life and last survivor expectancy table. The calculation rightly produces a smaller amount as a required minimum distribution than from use of the MDIB TABLE.

Other refinements include that taxpayers no longer need to name a beneficiary prior to their required beginning date, or decide whether to recalculate their life expectancy each year. A taxpayer can even change designated beneficiaries without increasing the RMD. Furthermore, through the use of disclaimers, beneficiaries may be changed after the taxpayer’s death. The new rules permit the calculation of post-death distributions to take into account the taxpayer’s remaining life expectancy at the time of death there by allowing distributions to be spread out over a number of years after death.

RMD’s at the death of the taxpayer are governed by two methods. The method used depends upon whether the taxpayer has designated a beneficiary is a spouse. The five-year rule requires distribution of the taxpayer’s entire interest by the end of the calendar year that contains the fifth anniversary of the taxpayer’s date of death.
The life expectancy rule requires that any portion of a taxpayer’s interest payable to a designated beneficiary be distributed over a period not to exceed the life expectancy of the beneficiary.

A surviving spouse who is the sole beneficiary steps into the shoes of the decedent taxpayer and RMD’s begin on or before the later of 1) the end of the calendar year of the taxpayer’s date of death or 2) the end of the calendar year the taxpayer would have reached 70 1/2.

VARIABLES

If the designated taxpayer beneficiary is not the taxpayer’s surviving spouse, the life expectancy rule requires distributions to begin on or before the end of the calendar year immediately following the year of the taxpayer’s death. Where there is more than one designated beneficiary, the life expectancy of the oldest is used to determine the distribution period for all beneficiaries. Where there is no designated beneficiary, then the five-year rule applies.

Overall, the IRS has made a concerted effort to make the RMD rules easier. RMDs are now generally lower, so current taxes are reduced and more assets remain and continue to grow in a tax-deferred environment. Taxpayers should remember that the new rules are the default rules; therefore, qualified plan and IRA documents should be amended where necessary to take advantage of the new rules.