New guidance for retirement plan distributions.

• Author: Bakale, Anthony

After two sets of proposed regulations, the IRS has issued final regulations on required minimum distributions (RMDs) from retirement plans, further simplifying the distribution rules. The new regulations also respond to provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) that changed the portability rules and uniform life expectancy tables for RMDs. To many, the new final regulations signal an increased interest on the Service's part to encourage taxpayers to save more money toward their retirement.

Background

The final regulations are the end of a long and controversial history of rules related to RMDs and are the final interpretation of the proposed regulations issued in 1987 and 2001 .The IRS originally issued proposed regulations in 1987, but they never became final. They were highly complex and required retirement account owners to make irrevocable elections by their required beginning date (RBD), the date by which retirement account owners are required to start withdrawing minimum amounts from their accounts. Generally, this date is April 1 of the year following attainment of age 70 1/2.

After receiving comments and complaints, the Service came out with new proposed regulations in 2001. Having received additional comments, the IRS has issued the final regulations, giving long-awaited closure to many previously unanswered questions. Although similar to the 2001 proposed regulations, the new guidelines contain some minor changes and additional items. The final regulations are effective January 2003. For 2002, taxpayers may rely on the final regulations or the proposed regulations of 2001 or 1987.

The regulations also respond to a provision in the EGTRRA that revised the uniform life expectancy tables to reflect current life expectancies more accurately than tables issued in 1987 (see Exhibit 1).

Summary of the Final Regulations

The final regulations have pushed up the deadline for determining a designated beneficiary from December 31 of the year after the retirement plan participant's death to September 30. This will allow for additional time to determine the amount due a beneficiary for his first RMD, which will need to be made before December 31 of the year after the participant's death. The drawback to this provision is that less time is available for post-mortem planning.

The regulations also provide guidance on the treatment of separate accounts with different beneficiaries. These accounts can now...