Navigating the maze of the required minimum distribution rules: new proposed regulations on required minimum distributions go a long way toward easing the complexity of prior proposed regulations, but are still appreciably unwieldy.

• Author: Weber, Richard P.
• Position: Employee benefits

EXECUTIVE SUMMARY

* The regulations are proposed to be effective for RMDs for calendar years beginning after 2001.

* An exception to use of the MDIB table applies when the account owner's sole beneficiary is a spouse more than 10 years younger than the account owner.

* The RBD depends on whether the account owner is living or deceased.

In January 2001, the IRS proposed regulations (1) on required distributions from retirement plans, such as qualified plans (including defined-contribution and defined-benefit plans), individual retirement plans (e.g., IRAs), Sec. 457 deferred compensation plans, Sec. 403(b) annuity contracts and custodial and retirement income accounts.

The proposed regulations replace proposed regulations issued in 1987. (2) The revised regulations are proposed to be effective for distributions for calendar years beginning after 2001; however, use before 2002 was available in limited circumstances. (3) For 2001 calendar-year distributions, IRA owners were permitted (but not required) to follow the proposed regulations, notwithstanding the terms of IRA documents. (This rule did not apply to distributions required to be made by April 1, 2001 for 2000. (4))

The new rules are a major simplification, but are not easy to follow. This article provides guidance on the proposed regulations' intricacies. (5) Key terms are defined in Exhibit 1 on p. 119.

RBD for RMDs

One of the more confusing aspects of the required minimum distribution (RMD) rules is determining the required beginning date (RBD). Two general rules apply. If the account owner is living, RMDs must generally begin in the year following the year in which the account owner reaches age 70 1/2 (or retires, if later, in some cases). If the account owner is deceased, the RBD for distributions to account beneficiaries varies depending on the beneficiary and certain elections. The proposed regulations address both rules.

Account Owner Living

Generally under Prop. Regs. Sec. 1.401(a)(9)-2, Q&A-2, plan distributions must begin by April 1 of the calendar year following the calendar year in which the (1) account owner turns 70 1/2 or (2) employee retires from employment with the employer maintaining the plan. Regs. Sec. 1.408-8, Q&A-1(b), defines an IRA account owner as an "employee" for purposes of the RMD rules. For a five-percent owner (as defined in Sec. 416(i)(1)(B)(i)), the RBD is April 1 of the calendar year following the calendar year in which he turns 70 1/2. (6) Exhibit 2 on p. 120 applies the age 70 1/2 RBD rules from 1999 through 2006.

Example 1:J was born on May 10, 1929. She reached age 70 1/2 in late 1999. Her RBD was no later than April 1, 2000. Her second RMD had to be made before 2001. She could elect to use the proposed RMD rules for her 2001 distribution or use the prior rules. The proposed rules are mandatory for her 2002 and subsequent-year distributions.

Example 2: L was born on Oct. 9, 1930. He reached age 70 1/2 in early 2001. His RBD is no later than April 1, 2002. The proposed RMD rules may be used for his first distribution; all subsequent RMDs must be made under the proposed rules.

Account Owner Deceased

According to Prop. Regs. Sec. 1.401(a)(9)-3, Q&A-3, for a deceased account owner, the RBD for one or more nonspousal beneficiaries is generally the end of the calendar year following the calendar year of the account owner's death. For a spousal beneficiary, the first RMD must be made by the later of the (1) calendar year following the calendar year of the employee's death or (2)...