Related Practices

• Estates and Trusts

On January 11, 2001, the IRS issued new regulations which greatly simplified the calculation of required annual minimum distribution from IRAs, qualified retirement plans and 403(b) plans.  The new rules eliminate many of the confusing choices (one life or two; fixed term or recalculate) that were previously mandated at age 70½.  IRA owners (and beneficiaries) may use the new rules to calculate their 2001 distributions.  Qualified Plan participants cannot use the new rules until their plans are amended, but the new regulations do not address their application to a 403(b) participant prior to the amendment of the 403(b) plan.

The new regulations prescribe a table containing factors to be used in calculating the required distribution for a particular year; the distribution will be calculated simply by multipling the factor for that year by the account/plan balance as of December 31 of the preceding year.  Take, for instance, the case of Henry and Carolyn Rose.  Henry is age 76 and Carolyn is age 72.  On December 31, 2000, the fair market value of Henry’s IRA was $300,000.  Henry had previously elected to use annually recalculated joint life expectancies to determine his annual minimum required distribution.  Using that method, Henry must withdraw $17,142.85 for 2001.  Under the new rules, Henry will only be required to withdraw $14,354.07, or $2,788.78 less.

Generally, using the new rules will result in smaller minimum required distributions and longer withdrawal periods.  This prolongs the income tax deferral period and promotes the continued growth of plan assets.  Therefore, all individuals currently receiving distributions should review their current minimum required distribution formula and compare it to the distributions required under the new table.

These changes also benefit anyone who has inherited an IRA or other plan which still holds undistributed assets.  The rules vary but, generally, a beneficiary is now permitted to use his or her own life expectancy rather than the deceased owner’s remaining term to determine the minimum required distribution.

Other changes, which relate to beneficiary designations, lessen the importance of choosing a beneficiary by age 70½ but increase the importance of having a proper beneficiary designation in place prior to death.

For further information regarding the new IRA and plan distribution rules, please contact any member of Cohen & Grigsby's Estates and Trusts Group.