IRS Simplifies Required Minimum Distributions

By: Frank Armstrong, CFP, AIF
In a sweeping simplification last week the IRS published new Proposed Regulations covering Required Minimum Distributions (RMD) from pension plans and IRA’s. Required Minimum Distributions affect pension and IRA account owners that have reached their Required Beginning Date (RBD) at age 70 ½.
Beneficiary selection at the Required Beginning Date is no longer irrevocable. You can now change beneficiaries as often as your changing life situation requires.
To make life even simpler, your required minimum distribution (RMD) calculation will not be affected by selection of beneficiary, or if the beneficiary changes. All RMD calculations during the life of the account holder will be based on the account owner’s age less ten years as published in IRS tables. There is one exception: if your spouse is the beneficiary AND he/she is more than 10 years younger than the account owner. In that case, the couple can use a joint life expectancy table that captures the spouse’s younger age and results in a lower required distribution.
It’s still important to carefully select your beneficiary, and contingent beneficiary. A failure to name a beneficiary will still lead to undesirable tax consequences. Failure to name the right beneficiary might still destroy the very best of estate and distribution plans.
In the vast majority of cases, the new calculation method will result in smaller required distributions, and longer deferral periods for account owners. Both of these are very good things indeed for the taxpayer.
The new regs clean up a messy problem. It will no longer be necessary to choose whether or not to re-calculate one or both lives. This greatly simplifies annual reckoning during life. But more importantly, it eases the penalty at death if a spouse whose life was being re-calculated dies and therefore has his/her life expectancy go to zero. Reducing the life expectancy of the deceased accelerates the required distributions for the remaining party.
Natural (that is real people as opposed to corporations and trusts) beneficiaries will in all cases be able to utilize their own remaining life expectancy to calculate distributions from inherited IRA’s. This will allow them to “stretch” out payments over far longer time frames than might have happened with some re-calculation methods. Again, this is a great thing for taxpayers.
Getting rid of the entire re-calculation issue resolves much of the uncertainty in estate planning for pension assets. Because the taxpayer had little control over the order of death of the spouses, the results were unpredictable. The consequences could often be disastrous if the “wrong” party died first and the size of the account was a significant portion of the couple’s net worth.
The new regs retain many favorable features of the old ones. Two that are especially noteworthy are:

  1. Spouses will still have the right to convert an inherited IRA into their own IRA as under the old regs.
  2. Qualifying trusts will still be able to defer distributions from IRA’s if they conform to the included published requirements that allow the IRS to “look through” the trust to determine the natural beneficiary.

Why is the IRS being so generous? Well, it’s not just that they are kinder and gentler. The old regs hadn’t established any reliable reporting requirements, so compliance suffered. The new regs require financial institutions to report account balances and distributions to the IRS so that required payments are much more likely to be made on time, and penalties extracted if they are not made on time. These are good things if your job is collecting taxes.
The new regulations are retroactive to January 1, 2001. While the regulations are “proposed” the IRS has indicated that taxpayers may rely on them beginning at once. After all, we operated under the old “proposed” regulations since 1986!
All in all, the new regulations simplify planning and reduce some of the uncertainty that the old regulations introduced. But, careful planning is still necessary to maximize the benefits of these important assets to yourself and your family.

By | 2018-11-29T16:46:40+00:00 September 20th, 2012|Blog|

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