Required Minimum Distributions at Age 70-1/2
And for Beneficiaries of Inherited IRAs, 401(k)s & Roth-IRAs 
with the Final IRS regulations for 2002 

Written and edited by Harry Rubins for his clients and friends.
Not intended as legal or tax advice.
Obtain professional advice before taking action on this information.

An important decision that effects how much the participant will be required to take out in taxable distributions each year and also effects how long their heirs (children) can keep the account tax deferred

• A multi-generational problem that requires careful planning

Final IRS Regulations
Before taking action obtain professional advice. 
For a fee based consultation Email me at harry@rubins401k.com

Thank you IRS. The IRS really did make the age 70 ½ Required Minimum Distribution (RMD) election SIMPLE and LESS TAXING for the account participant, their heirs and professional advisors. Final IRS regulations were issued April 17, 2002 effective for 2003 and beyond

• The Final Regulations maintained the basic changes of the Proposed Regulations in providing SIMPLE and Less Taxing RMDs. The Final regulation did add two major changes.

  • The Uniform Distribution Tables were updated for the participant at age 70 ½ and the beneficiary inheriting the account giving a person about one more year of average life expectancy further reducing the amount of taxable RMD.

  • What is really surprising, is that the final Regs may allow beneficiaries who inherited IRAs years ago to go back & use the final Regs, as if they were in effect at that time. The process of Re-determination & Recalculation will benefit beneficiaries inheriting accounts under the old 5 year rule or for those who were forced to use the oldest beneficiary's life expectancy and not their own. Although complex, this could significantly extend the life of the tax- deferred account with smaller annual RMDs. Professional assistance is required or for a fee-based consultation email me at harry@rubins401k.com.
    
    
• The RMD calculation, beginning at age 70½ has been simplified. RMD calculation will create a smaller taxable distribution and is not dependent on whether a beneficiary has been named. There is a special opportunity for account holders who are married and have spouses who are more than 10 years younger and are the sole primary beneficiary - even smaller taxable RMDs.
   
• People currently taking age 70 ½ distributions will be able to change beneficiaries and use the new (RMD) distribution method, which in most cases, have smaller taxable distributions.
   
• The final rules allow for some interesting post mortem planning with IRA accounts by splitting the IRA into separate accounts for each beneficiary, disclaimers to other named beneficiaries and direct cash out distribution to the beneficiaries up to September 30th of the year following the year of death of the participant. This is known as the GAP period. This does not apply to Trust beneficiaries.
   
• The final Regs allows designated beneficiaries of participants who died January 1, 2001 or after, to stretch out the tax deferral with smaller taxable RMDs using the heirs life expectancy with the new longer life expectancy table. This avoids many problems with the old Regs.
   
• The IRS backed off the reporting requirements for financial institutions in the final regulations. Beginning in 2003, the custodians will have to report only to IRA owners and not the IRS. Beginning in 2004, the custodians will have to report to the IRS, accounts that are subject to required minimum distributions but NOT the amounts. This is a first step towards the broader goal of IRS reporting in order to check compliance.

• What plans are exempt? Roth - IRA

• What plans can start later than Age 70 ½?
  • Participants in 401(k) and other qualified plans that are still working and are less than 5% owner are not required to take RMD's. They must start RMD the year following retirement
  • 403(b) plans that has account balances prior to 12/13/86 are not required to take RMD's based on the account balances for contributions made after 1/1/87. Must start RMD on the entire 403(b) at age 75

• How to calculate Age 70 ½ 1^st year's RMD? - Simple!
  • Obtain previous years Dec 31^st account balance
  • Determine how old are you on Dec 31^st in the year you are age 70 ½. Hint - you can only be either age 70 or 71. Then look up the value for your age in Uniform Distribution Table.

• How to calculate subsequent years RMD?
  For next year's RMD, you find your age's applicable divisor in Uniform Distribution Table and the previous year's Dec 31 balance. If you were age 70 for your 1^st year's RMD your Applicable Divisor in the 2^nd RMD year is 26.5 year based on age 71 (Final REG)

• When must each years RMD be withdrawn from each account
  • First years RMD by April 1^st of year following year age 70 ½ (known as Required Beginning Date)
  • Each subsequent year by 12/31 of that year

• Penalty for not taking all or part of RMD each year - 50% excise penalty tax in addition to federal and state income taxes when withdrawn.

• Exception for a spouse who is more than 10 years younger and is the sole primary beneficiary:
  You get to use a joint life expectancy table for smaller taxable 70 ½ RMD's.

• What about the beneficiary? It's simple - you don't need one to begin RMD's. You can add or change beneficiaries at any time in the future without a problem. Just make sure you have listed both primary and contingent Designated Beneficiaries the day before you die!

For People Who Started Age 70 ½ RMD's prior to 1/1/2001

• They can switch to the final IRS rules in 2002 & beyond
  - RMD's in 2002 & beyond will be smaller taxable distribution
  - Beneficiaries can be added or changed at any time

• What Inherited Plans are Exempt - None
  • Inherited Roth-IRA accounts are subject to beneficiary's taking RMD's after the death of the participant even though the participant was exempt (no age 70 ½ RMD)

• Has the Decendent's RMD been taken in the year of death?
  If Yes - no action required
  If No - beneficiary is responsible to complete the RMD by December 31^st of the year of death. Taxes and penalties will be paid by beneficiary and not the decendent's estate

• When are the beneficiaries determined for purposes of being defined as a Designated Beneficiary
  • A designated beneficiary is determined on December 30^th in 2003 of the year following the death of the account holder. (The GAP period). This does not apply to beneficiaries of a Trust.
  • Disclaimers (within 9 months) to other named beneficiaries, actual cash distributions or separation of account with multiple beneficiaries can be made Sept. 30th. This does not apply to beneficiaries of Trusts.
  • No new beneficiaries can be added after the death of the account holder.

• How to calculate the non-spouse beneficiary's 1^st years RMD-Simple!
  • Obtain decedents account balance on December 31^st of the year of death
  • Determine how old the beneficiary is on December 31^st of the year following decedents death. Assumes sole beneficiary or account has been separated during the GAP period, if multiple beneficiaries. For multiple beneficiaries, who are not separated into individual accounts during the GAP period, all beneficiaries must use the life expectancy of the oldest beneficiary. A strict interpretation of the final Regs for separating multiple beneficiaries says that in the year accounts are separated, the oldest beneficiaries? life expectancy must be used & then in the following year each individual?s life expectancy can be used. As a suggestion, the accounts should be separated in the year of the descendant?s death..
  • Look up value in Inherited Single Life Expectancy Table - Example beneficiary age 38 inheriting account year following death of decendent. Age 38 = 45.6 year Life Expectancy (Final REG)

• How to calculate Non-Spouse subsequent year's RMD
  • For next year's RMD you reduce your original life expectancy by 1.0 each year. In above example the 2^nd years life expectancy will be 44.6 years (45.6 - 1.0 years using Final Reg)

• When must each year's RMD be withdrawn from each account
  • First years inherited RMD by December 31^st of the year following death of decendent
  • Each subsequent year by December 31^st

• Penalty for beneficiary not taking all or part of RMD each year
  • 50% excersise penalty tax in addition to Federal and State income taxes when withdrawn

• Exception for Spouse Beneficiary
  • The surviving spouse may elect to re-register the decendents account as an inherited account or rollover the account to their IRA account.
  • If it is re-registered as an inherited account & the surviving spouse was the sole beneficiary, then he or she is not required to begin RMD until the year the descendent would have reached age 70 ½, had the account owner lived. The Inherited Single Life Expectancy Table is used to calculate the RMD the same as a Non-Spouse beneficiary reducing the original life expectancy by one each year.
  • If the inherited account is rolled over to the surviving spouse?s account, there is no RMD required until the surviving spouse is age 70 ½. The spouse beneficiary at 70 ½ will use the Inherited Single Life Expectancy Table to calculate the age 70 ½ RMD. For subsequent RMD, the surviving spouse uses the Inherited Single Life Expectancy Table based on their age to determine their applicable divisor each year, rather than reducing the original life expectancy by 1.0 each year. This produces a smaller RMD for the spouse beneficiary in subsequent years.
  • The Spouse can do a rollover regardless of whether or not she or he is a sole beneficiary. There is no deadline for rolling over the spouse's separate share.

• What about the new beneficiary for the inherited account? It's simple!
  You don't need one to begin RMD. You can add or change beneficiaries at any time in the future without a problem Just make sure you have listed both primary and contingent beneficiaries the day before you die!

This is a partial survey of the Final IRS regulations. There are many details including the Joint Life Table that have not been included due to limited space and complexities of the IRS Regulations.

* 12/31 balance previous year ÷ Applicable Divisor = RMD

Example: Non-spouse designated beneficiary inherits IRA or Roth-IRA at age 50 (year following death of account holders) and uses 34.2 years life expectancy from table. The 34.2 years life expectancy is reduced by 1.0 year for each subsequent RMD year.

Note: If there is no designated beneficiary the heir must use the remaining life expectancy of the descendent (year following death of account holder) reduced by 1.0 year for each subsequent RMD year.