Required Distributions for Retirement Plan Assets – Christopher Hoyt’s Plain English Summary for Donors and Clients
Changes were made in a surprise announcement on January 11, 2001 to IRA distribution rules. The proposed regulations under Section 401(a)(9) have a significant impact on estate and charitable planning for retirement plan assets. While these changes may make it easier to pass retirement plan assets to heirs, qualified tax deferred dollars will continue to be some of the most efficient gifts to charity, as they will avoid the income in respect of a decedent (IRD) penalty in many donors’ estate plans. These regulations also eliminate the past penalties associated with naming a charity as a beneficiary to share retirement plan proceeds with heirs. There are other sites with more detailed explanations to cover the 108 pages of changes, but that’s not within the scope of this simplified summary.
Professor Christopher R. Hoyt, has presented a simple way to explain the new IRA distribution regulations to clients, donors and friends. The following is a short summary that includes the tables and exact percentages that they will need to comply with the new laws. He notes:
The new rules are absolutely wonderful, compared to the old rules. For example, it is very easy to name a charity as a beneficiary of part or all of a person’s retirement account without accelerating distributions over the person’s lifetime or after death.
Over the account owner’s lifetime, the minimum distributions are the same whether a charity is named as a beneficiary or not. After the account owner’s death, however, the administrator will usually want to “cash out” the charity’s share of the account before the end of the year that follows the year that the account owner died. That will leave only non-charitable beneficiaries at the end of that year and will give those beneficiaries greater flexibility than if the charity is still a beneficiary. Overall, this cash-out strategy permits a charity to be a beneficiary of part or all of any IRA or retirement plan account without causing any problems to the other beneficiaries, such as children.
At the end of this message is the summary. It is the bare-bone basics. For more complicated situations (e.g., a trust is a beneficiary, rollovers to surviving spouses, death before age 70 ½, contingent beneficiaries, etc.) you’ll need a competent person to look at the regulations. Joe Hodges posted several Web sites where the regulations can be retrieved at no cost. They are:
http://deathandtaxes.com/mrdreg.htm
http://www.ira-web.com/newreg.htm
http://www.benefitslink.com/taxregs/1.401a9-proposed-2001.shtml
http://pub.bna.com/pbd/130477.htm
DISCLAIMER: The opinions expressed in this message are those of the author and do not necessarily reflect the views of the University of Missouri. The statements apply to a general discussion of legal issues and do not constitute legal advice or a legal opinion. No attorney-client relationship is created by this message. Seek independent counsel to act upon any ideas presented in this message.
REQUIRED DISTRIBUTIONS OVER YOUR LIFETIME AFTER AGE 70 ½
GENERAL RULES
Unless you are married to someone who is more than ten years younger than you, there is one — and only one — table of numbers that tells you the portion of your IRA, 403(b) plan or qualified retirement plan that must be distributed to you each year after you attain the age of 70 ½.
The only exception to this table is if (1) you are married to a person who is more than ten years younger than you and (2) she or he is the only beneficiary on the account. In that case the required amounts are even less than the amounts shown in the table. To be exact, the required amounts are based on the actual joint life expectancy of you and your younger spouse.
TWO SIMPLE STEPS
Step 1: Find out the value of your investments in your retirement plan account on the last day of the preceding year. For example, on New Years Day you can look at the closing stock prices for December 31.
Step 2: Multiply the value of your investments by the percentage in the table that is next to the age that you will be at the end of this year. This is the minimum amount (RMD) that you must receive this year to avoid a 50% penalty.
Example: Ann T. Emm had $100,000 in her only IRA at the beginning of the year. She will be age 82 at the end of this year. She must receive at least $6,250 during the year to avoid a 50% penalty (6.25% times $100,000).
THE TABLE:
(Law: Prop. Reg. Sec. 1.401(a)(9)-5 Q&A 4(a)(2) (2001))
|
Age |
RMD |
Age |
RMD |
Age |
RMD |
|
70 |
3.8168% |
83 |
6.5359% |
96 |
13.6986% |
|
71 |
3.9526% |
84 |
6.8966% |
97 |
14.4928% |
|
72 |
4.0984% |
85 |
7.2464% |
98 |
15.3846% |
|
73 |
4.2553% |
86 |
7.6336% |
99 |
16.3934% |
|
74 |
4.4053% |
87 |
8.0645% |
100 |
17.5439% |
|
75 |
4.5872% |
88 |
8.4746% |
101 |
18.8679% |
|
76 |
4.7847% |
89 |
9.0090% |
102 |
20.0000% |
|
77 |
4.9751% |
90 |
9.5238% |
103 |
21.2766% |
|
78 |
5.2083% |
91 |
10.1010% |
104 |
22.7273% |
|
79 |
5.4348% |
92 |
10.6383% |
105 |
24.3902% |
|
80 |
5.6818% |
93 |
11.3636% |
|
|
|
81 |
5.9524% |
94 |
12.0482% |
|
|
|
82 |
6.2500% |
95 |
12.8205% |
|
|
Unlike the old law, there is no longer any different payout based on who you name to be the beneficiary of your account after your death. The minimum lifetime distributions over the rest of your life will be the same whether you name a charity, your father, your mother, your sister, your brother, your child, your grandchild, your dog or your cat. However, distributions after your death can vary depending on who the beneficiary is.
REQUIRED DISTRIBUTIONS AFTER DEATH FOR PEOPLE WHO DIE AFTER “THE REQUIRED BEGINNING DATE” (after April 1 of the year that follows the year that the person attained age 70 ½).
RULES IF SPOUSE IS NOT A DESIGNATED BENEFICIARY (Spouses generally qualify for the most favorable treatment, such as rollovers)
GENERAL RULE
The general rule is that distributions can be made from the decedent’s account over the life expectancy of a person who is the same age that the decedent would have been on the last day of the year in which she or he died. Prop. Reg. Sec. 1.401(a)(9)-5, Q&A 5(a)(2) and 5(c)(3)
EXAMPLE: Sam died at the age of 79. His IRA must be emptied over the next 10 years, since a 79 year old person has a life expectancy of 10 years. The minimum required distribution for each year is 1/10th of the account balance in the first year, 1/9th the second year, 1/8th the third year, and so on.
EXCEPTION IF THERE IS A YOUNGER DESIGNATED BENEFICIARY
Instead of distributing the amounts over the life expectancy of someone who is the decedent’s age, amounts can be distributed over the longer life expectancy of the designated beneficiary. The life expectancy of the designated beneficiary is determined by using the beneficiary’s age as of the beneficiary’s birthday in the calendar year immediately following the calendar year of the employee’s death. Prop. Reg. Sec. 1.401(a)(9)-5, Q&A 5(c)(1).
EXAMPLE: When Sam died at the age of 79 he had named his 22 year old granddaughter as the sole beneficiary of the IRA. Next year his granddaughter was age 23. According to the table, a 23 year old has a life expectancy of 59 years. Thus, instead of distributing the amounts over 10 years the amounts can be distributed over 59 years. The first required distribution is 1/59th, next year it is 1/58th, etc. etc.
WHAT IF THERE ARE TWO OR MORE BENEFICIARIES?
Generally the distributions are measured by the beneficiary with the shortest life expectancy. Prop. Reg. Sec. 1.401(a)(9)-5, Q&A 7(a)(1). However, separate distribution computations may be possible with separate accounts. Prop. Reg. Sec. 1.401(a)(9)-8, Q&A 2 and 3.
EXAMPLE: Sam named both his 58 year old nephew and his 22 year granddaughter as equal co-beneficiaries. Distributions to both beneficiaries are based on the older nephew’s life expectancy. However, separate distribution computations may be possible with separate accounts for each beneficiary.
WHAT IF ONE BENEFICIARY IS A CHARITY?
GENERAL RULE: The minimum distributions revert to the decedent’s remaining life expectancy. The other beneficiaries (e.g., children and grandchildren) cannot use their longer life expectancies. The logic is that a charity does not have a life expectancy. Prop. Reg. Sec. 1.401(a)(9)-5, Q&A 7(a)(1)(last sentence).
SOLUTIONS WHEN A CHARITY IS A BENEFICIARY:
#1: A SEPARATE ACCOUNT FOR THE CHARITY: Prop. Reg. Sec. 1.401(a)(9)-8,
Q&A 2 and 3. In that case, the distributions to the other beneficiaries are computed without regard to the account for the charity.
#2: CASH OUT THE CHARITY’s INTEREST BEFORE THE END OF THE NEXT YEAR: If the charity’s entire share is distributed before the end of the calendar year that follows the year of death, then the charity is no longer a beneficiary and will not affect the distribution period. This is because the point in time when the final beneficiaries are determined is the last day of the calendar year following the calendar year of the account owner’s death. Prop. Reg. Sec. 1.401(a)(9)-4, Q&A 4(a).
HERE IS THE TABLE FOR MEASURING THE REMAINING YEARS OF REQUIRED DISTRIBUTION USING EITHER (1) THE REMAINING LIFE EXPECTANCY OF THE ACCOUNT OWNER OR (2) THE LIFE EXPECTANCY OF THE DESIGNATED BENEFICIARY, WHICHEVER IS APPROPRIATE.
Table V of Reg. 1.72-9, as required by Prop. Reg. Sec. 1.401(a)(9)-5, Q&A 6.
|
Age |
Life Expectancy |
Age |
Life Expectancy |
Age |
Life Expectancy |
|
|
76.6 |
41 |
41.5 |
77 |
11.2 |
|
|
75.6 |
42 |
40.6 |
78 |
10.6 |
|
|
74.7 |
43 |
39.6 |
79 |
10.0 |
|
|
73.7 |
44 |
38.7 |
80 |
9.5 |
|
|
72.7 |
45 |
37.7 |
81 |
8.9 |
|
10 |
71.7 |
46 |
36.8 |
82 |
8.4 |
|
11 |
70.7 |
47 |
35.9 |
83 |
7.9 |
|
12 |
69.7 |
48 |
34.9 |
84 |
7.4 |
|
13 |
68.8 |
49 |
34.0 |
85 |
6.9 |
|
14 |
67.8 |
50 |
33.1 |
86 |
6.5 |
|
15 |
66.8 |
51 |
32.2 |
87 |
6.1 |
|
16 |
65.8 |
52 |
31.3 |
88 |
5.7 |
|
17 |
64.8 |
53 |
30.4 |
89 |
5.3 |
|
18 |
63.9 |
54 |
29.5 |
90 |
5.0 |
|
19 |
62.9 |
55 |
28.6 |
91 |
4.7 |
|
20 |
61.9 |
56 |
27.7 |
92 |
4.4 |
|
21 |
60.9 |
57 |
26.8 |
93 |
4.1 |
|
22 |
59.9 |
58 |
25.9 |
94 |
3.9 |
|
23 |
59.0 |
59 |
25.0 |
95 |
3.7 |
|
24 |
58.0 |
60 |
24.2 |
96 |
3.4 |
|
25 |
57.0 |
61 |
23.3 |
97 |
3.2 |
|
26 |
56.0 |
62 |
22.5 |
98 |
3.0 |
|
27 |
55.1 |
63 |
21.6 |
99 |
2.8 |
|
28 |
54.1 |
64 |
20.8 |
100 |
2.7 |
|
29 |
53.1 |
65 |
20.0 |
101 |
2.5 |
|
30 |
52.2 |
66 |
19.2 |
102 |
2.3 |
|
31 |
51.2 |
67 |
18.4 |
103 |
2.1 |
|
32 |
50.2 |
68 |
17.6 |
104 |
1.9 |
|
33 |
49.3 |
69 |
16.8 |
105 |
1.8 |
|
34 |
48.3 |
70 |
16.0 |
106 |
1.6 |
|
35 |
47.3 |
71 |
15.3 |
107 |
1.4 |
|
36 |
46.4 |
72 |
14.6 |
|
|
|
37 |
45.4 |
73 |
13.9 |
|
|
|
38 |
44.4 |
74 |
13.2 |
|
|
|
39 |
43.5 |
75 |
12.5 |
|
|
|
40 |
42.5 |
76 |
11.9 |
|
|