BOOM!
That was the sound of the newly proposed IRS regulations on required minimum distributions (RMD) from IRAs and retirement plans hitting the desks of financial and estate planners on the afternoon of Thursday, January 11, 2001.
Ooooof!
That was the sound of the collective gasp of IRA and retirement plan experts around the country as they realized that this unexpected move by the IRS had instantly negated much of the voluminous, detailed advice and commentary on RMD now contained in numerous books, articles, and specialized areas of many websites, including this one. Most of us who deal in RMD exotica were caught totally by surprise.
What's the big deal?
In one masterful stroke, the IRS simplified the arcane and highly complex decisions and calculations previously required for RMDs. Under old distribution rules, retirement account owners who reached age 70 1/2 had to select a beneficiary for those accounts. Then they had to decide whether to take withdrawals from those accounts using a joint or single life expectancy under a term-certain, recalculation, or hybrid method. All choices were irrevocable, and they determined how rapidly retirement account proceeds had to be taken by the owner during life or by the beneficiary after the owner's death. Up to eight different methods of calculating RMD existed. And, choosing the wrong method and/or beneficiary could -- and, unfortunately, often did -- cost the family huge losses to the taxman.
Most of us can now bid adieu and good riddance to those complex choices. Effective immediately, those age 70 1/2 or older have a choice of using the new rules or the old ones. "What," you ask, "do the new rules change?" Simply stated, they change a lot. First and foremost, they require using a single life-expectancy table. That table is based on the account owner's attained age, and it assumes the owner has a beneficiary who is 10 years younger than he or she is. Each year, the account owner finds a factor in that table based on his or her attained age in that year. That factor is then divided into the account balance as of the end of the previous year. The result becomes the RMD the person must take for that year.
Where can you find the table required for use? Well, it's buried deep inside the proposed regulations. But, in reality, it's the Minimum Distribution Incidental Benefit (MDIB) table found in IRS Publication 590, Individual Retirement Arrangements. The RMD factors in that table produce the lowest possible distributions for most folks, and that prolongs both the tax-deferred compounding and the life of the retirement account. The only exception to using the MDIB table is for those who are married to a spouse more than 10 years younger than they are. Those folks can use a joint life expectancy table, which produces an even lower RMD.
More good stuff
Another neat feature of the proposed regulations is that selecting a beneficiary when your RMDs begin is no longer critical. You can now change beneficiaries at will, because choosing a beneficiary will have no impact on how fast your retirement account must be paid out. In fact, when you finally meet your maker, the actual beneficiary doesn't even have to be determined until December 31 of the following year. That little proviso allows a primary beneficiary (such as a spouse) to disclaim the account in favor of a younger, contingent beneficiary (such as a child or grandchild). The newly named beneficiary could then take RMDs from what's left in the retirement account over his or her life expectancy in that year. Result? An automatic stretch IRA for all.
The only way the life of the account can't be prolonged is by failing to name a beneficiary at all. In that event, and if you had not yet reached your required beginning date for RMDs, the account would have to be paid out to your estate by December 31 of the fifth year following the year of your death. If you die after RMDs have begun, then the account can be paid to your estate over time, based on your life expectancy as calculated in the year of your death. That life expectancy would be reduced by one in each subsequent year to calculate that year's payout.
In my opinion, the proposed regulations will give all of us the best possible result when taking RMDs from retirement accounts. Until the IRS says otherwise, you can use the old rules or the new ones, whichever best fits your needs. Further, if you have already begun RMDs under the old rules, you are free to switch to the new ones to obtain a better result for you and your family. You can't really ask for a better application of the rules than that. But, is it all sweetness and light?
New accountability
Perhaps not. Under the new rules, retirement account custodians will be required to compute and report RMDs to you and to the IRS each year, probably starting sometime in 2002 or 2003. That makes it much easier for the IRS to track RMDs to ensure they are taken, and to assess the 50% penalty when they are not. If you have multiple IRAs, each custodian will do the necessary calculation and report the RMD for that account. You must take the total of the RMD calculated for all the IRAs; however, that sum does not have to come from each IRA. Instead, you can take the total from one or more IRAs, as desired.
Under the old rules, you did most of the RMD calculations yourself, and were pretty much on the honor system to ensure RMDs were taken and reported each year. There was no effective way for the IRS to check your compliance except through an individual audit. Therefore, the 50% penalty for failure to take RMDs was rarely assessed. Now, though, it will be easier for the IRS to verify you have complied with the law. That's not a big deal, but it does mean you can't forget to make your withdrawals as required. Otherwise, the IRS will easily detect that error and it will quickly assess the 50% penalty when you fail to do so. Thus, a mistake in this regard could be very costly indeed.
A multitude of financial and estate planning experts are still assessing the new rules. That means you can expect further explanations and details as the full implications of the IRS action become clearer. As we learn more, you can be certain we'll publish more on the topic. In the meantime, stay tuned for film and other highlights at eleven.
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