The Required Minimum Distribution (RMD) Rules for calculating your annual distribution from an individual retirement account (IRA) have been greatly simplified. On January 11, 2001, the IRS issued new regulations. The new regulations provide a Uniform Table and method for calculating the required minimum distribution for all IRA owners regardless of the named beneficiary, with one exception. This exception is for a spouse beneficiary who is more than ten years younger than the IRA owner. In this instance only, you would apply the tables from the old regulations.
The new Uniform Table will generally reduce the amount of the required annual minimum distribution for an IRA owner. These new regulations apply to everyone, even if you have been required to take distributions for many years. Certain irrevocable tax elections made by an IRA owner at age 70 are now irreleveant under the new regulations. The new Uniform Table accompanies this memorandum.
To calculate the required minimum distribution, determine: (a) the account balance as of the preceding calendar year end; (b) your age on your birthday in the year of distribution; and (c) the applicable divisor for that age from the Uniform Table. Simply divide (a) by (c) to determine your required minimum distribution.Print This Page
For example, assume Mrs. Smith turns age 73 on her birthday in year 2001. The applicable divisor for age 73 is 23.5. The value of her IRA on December 31, 2001 was $750,000. Mrs. Smith's required minimum distribution for year 2001 is $31,915, the result when $750,000 (the account balance) is divided by 23.5 (the applicable divisor). This calculation is irrespective of the named designated beneficiary and is not dependent on any tax elections to be made at the required beginning date.
A parent may designate a child as the named beneficiary, in which case the IRA will continue after the parent's death as an inherited IRA for the benefit of the child. The applicable distribution period for the inherited IRA after the death of the parent will be the life expectancy of the child. As such, a child may receive an inherited IRA with the requirement of taking a minimum distribution the year following the parent's date of death using a divisor based on the child's actual life expectancy. For example, assume Kenny receives an inherited IRA from his deceased mother valued at one million dollars on December 31, of the year of her death. Kenny is age 43, with a life expectancy of 39.5 years under the IRS tables. In the year following his mother's death, Kenny will be required to withdraw 1/39.5 of the IRA, or $25,316. In each succeeding year, the denominator shall be reduced by one with respect to determining his required minimum distribution.
Care still must be taken with respect to appointing the appropriate designated beneficiary before you die. An IRA owner must still name one or more people or charities as beneficiaries, but the new rules do allow the plan administrator to divide the IRA into several different accounts at death in order for each inherited IRA to have its own owner for minimum distribution purposes. If you name your estate as the beneficiary, the new rules seem to permit the Personal Representative of your estate to distribute the IRA proceeds under your will and then treat the new beneficiaries as designated beneficiaries, provided this is all accomplished by the end of the year following your death.
My firm encourages you to review your IRA beneficiary designation to make sure it is correct and to assure yourself that you are taking advantage of these new proposed regulations. One exceptional benefit of the new rules is that all IRA owners now have a second chance to insure the most advantageous distribution of their accounts to their named beneficiaries at death.
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