Calculating IRA distributions.

• Author: Goldberg, Michael J.

The IRS has issued a 108-page proposal containing proposed regulations on retirement account minimum required distributions (MRDs), which apply to qualified plans, individual retirement plans, deferred compensation plans under Sec. 457, and Sec. 403(b) annuity contracts, custodial accounts and retirement income accounts. Under the proposed regulations, most IRA owners should find it much simpler to calculate MRDs. Although the regulations are still under review, the Service is allowing IRA owners to begin using them for 2001 MRDs.

Simplification

In response to extensive comments, the IRS substantially simplified the 1987 proposed rules for calculating MRDs, while keeping intact many of the other 1987 rules.

The new proposed regulations simplify the rules by:

* Providing an easy-to-use table for determining MRDs during an employee's life. The calculations are simple because an employee no longer needs to (1) determine his beneficiary by the employee's required beginning date (RBD), (2) decide whether to recalculate his life expectancy each year in determining MRDs and (3) satisfy a separate incidental death-benefit rule.

* Permitting the employee to calculate MRDs during his life without regard to the beneficiary's age (except when the employee can reduce the MRDs by taking into account the age of a beneficiary-spouse more than 10 years younger. than the employee).

* Permitting a change in beneficiary as late as the end of the year following the year of the employee's death, by an employee changing designated beneficiaries after the RBD, which will not increase the MRD, and one or more beneficiaries disclaiming or cashing out or both.

* Permitting the calculation (with qualifications) of post-death MRDs to take into account an employee's remaining life expectancy at the time of death, thus allowing distributions in all cases to be spread over a number of years after death.

The employee is still required to take MRD by April 1 of the year-following the year he turns age 701/2. Failure to take the MRD could result in paying a penalty equal to 50% of the amount that should have been distributed. It is critical to plan and take the appropriate distribution to avoid this penalty.

New Rule Advantages

As under the old rules, taxpayers still want distributions to be as small as possible to delay incurring taxes, which also preserves their capital's earning potential through, compounding investments. In all situations under the new rules, MRDs cannot...