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Proposed MRD Rules Arrive
by Robert Moshman, JD
ules for minimum required distributions (MRDs) from IRAs and qualified retirement plans have been simplified by Proposed Regulations 130477-00 and 130481-00. One significant innovation is a table that can be used to calculate the annual MRD based on the recipient's age and the balance of the retirement account at the end of the previous year. By using the table, one can avoid working with several of the most cumbersome aspects of calculations under the 1987 proposed regs, i.e., the recalculation of life expectancy, the designation of a beneficiary prior to the required beginning date (RBD), and the incidental death benefit rule.
It is generally preferable to postpone distributions from IRAs and qualified retirement plans for as long as possible so that assets can benefit from their tax-deferred status for as long as possible. In the past, minimizing distributions could backfire on certain taxpayers due to rules imposing a 15% excise tax on excess accumulations and distributions under §4980A. However, these "success taxes" were eliminated by The Taxpayer Relief Act of 1997. As a result, taxpayers now can concentrate on limiting distributions.
One basic technique for minimizing distributions has been to use the joint life expectancy of the IRA owner (or plan participant) and a beneficiary to calculate the required minimum distributions. Selecting a beneficiary who is younger than the owner or participant will increase the joint life expectancy and decrease the size of payments that must be made. However, the "incidental benefit" rule limits the age disparity between the owner or plan participant and a non-spousal beneficiary to 10 years for purposes of calculating a joint life expectancy. Prop. Reg. §1.401(a)(9)-2 (1987). Life expectancies can also be recalculated annually under §401(a)(9)(D).
Under the newly proposed regulations, most plan participants and IRA owners would have smaller minimum distributions, yet MRD calculations would not be dependent on the beneficiary's age. However, a longer payout period would apply where the beneficiary is a spouse who is more than 10 years younger than the employee. Another significant change affects post-death distributions to a nonspousal beneficiary. A life expectancy rule would apply instead of the five-year rule regardless of whether the death occurs before or after the participant's or holder's required beginning date.
Although final regulations would apply in the 2002 calendar year, taxpayers have the option of using the proposed regs to calculate 2001 distributions.
Note that a provision of the Taxpayer Relief Act of 2000 (the Act), which was passed by the House of Representatives in October of 2000 but which was not voted on by the Senate, required the IRS to simplify and finalize MRD regulations by December 31, 2001. The IRS has already taken a major step in that direction.
Other provisions of the Act, which appear likely to be supported and included in any tax package this year, would also have allowed participants and account holders to revise their beneficiary designations and elect a new method of calculating life expectancies when the new regulations are finalized. The Act made several other significant changes and the progress of such legislation will be monitored throughout the coming year.
Robert Moshman, JD, can be reached at bmoshman@optonline or (800) 572?2468 with any questions, comments or suggestions. He authors the Estate Analyst.
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