Final Required Minimum Distribution (RMD) Regulations
Rev. 03/04/04, E-mail Alert 2004-5

This article is a 2004 summary of highlights of the 2002 IRS Final Required Minimum Distribution (RMD) Regulations. The regulations provide required minimum distribution rules for qualified plans under 401(a), IRAs, 403(b)s and governmental 457 plans. In addition, it released Notice 2002-27 which describes IRA reporting requirements for required minimum distributions. The final regulations greatly simplify the required minimum calculation process.

CALCULATION SIMPLIFICATIONS

• RMDs taken during the grace period, after December 31st but on or before April 1st, will no longer have to be subtracted from the previous December 31st balance before calculating the second calendar year's distribution.
  
• Contributions made after January 1st for the prior year no longer have to be added back to the prior year December 31st balance, except for rollovers and recharacterized conversion amounts which are not in any account at December 31st.
  
• Marital status changes are determined as of January 1st each year for calculation purposes. Thus, any change in marital status after January 1 will not be effective until the following January 1, so that the payouts can be calculated as of a set time.
  

BENEFITS OF THE FINAL RULES AS COMPARED TO THE OLD RULES

• Required distributions are much simpler to calculate and easier to explain.
  
• Distribution amounts are SMALLER.
  
• The choice of beneficiary does not adversely affect the participant's distributions.
  
• The participant can freely change beneficiaries after age 70½.
  
• If only the minimum amount is taken each year, the participant will never outlive his/her retirement funds. (The participant potentially could have out lived his/her funds under the old term certain method, while the old recalculation method was affected negatively by the death of the account holder or his/her beneficiary.)

NEW LIFE EXPECTANCY TABLES
Effective in 2003, a new “Uniform Lifetime Table” is to be used to determine the participant's life expectancy for RMDs. This Uniform Lifetime Table will be used to calculate life expectancy unless the participant has a spouse who is more than 10 years younger. The joint life expectancy tables are to be used in such situations. The tables were the first update of the IRS Life Expectancy Tables since the mid-1980s, and they more accurately reflect current life expectancy. For example, the new “Uniform Lifetime Table” has a life expectancy of 27.4 years at age 70, versus the old MDIB table that used 26.4 years. The Joint and Single Life Tables have also been updated for the first time since 1986. For example, the single life expectancy to be used in 2003 for an individual age 70 will be 17 years instead of the previous table's 16 years. The Single Life Table is now only used to determine life expectancy of individual beneficiaries after the death of the participant.

Minimum Required Distribution Calculation Example
If a 70 year old, who is attaining age 70½ in 2009, had a balance of $27,400 as of December 31, 2008. The minimum required amount would be determined by dividing the account balance on December 31, 2008, by the life expectancy factor based on the attained age in the year the participant reaches age 70½. In this example, the figures would be $27,400 divided by 27.4 for a minimum required distribution of $1,000 for 2009.

The RMD Regulations also provide the beneficiary rules, highlights follow:

BENEFICIARY OPTIONS CHART Click here.

BENEFICIARY DETERMINATION DEADLINE
In response to feedback on the proposed regulations, the IRS has changed the deadline for finalizing the naming of a beneficiary from December 31st of the year following death to September 30th of that year. This was done to provide sufficient time to calculate and process the RMD by the December 31st deadline.

CLARIFYING DETERMINATION OF THE DESIGNATED BENEFICIARY RULES
The designated beneficiary will be any remaining beneficiary as of September 30th following the year of death. Thus, any beneficiary(s) who already took a lump sum and any beneficiary(s) who disclaimed would be disregarded for purposes of determining the RMD. The disclaimer must satisfy IRC section 2518.

“DESIGNATED BENEFICIARY”
The “designated beneficiary” is defined as an individual or a group of individuals who are formally named to inherit the participant's retirement benefits upon his/her death.

SEPARATE ACCOUNTS FOR MULTIPLE BENEFICIARIES
The rules have been clarified and provide that if the beneficiaries' amounts are placed in separate accounts by December 31st of the year after the participant's death, each beneficiary may use his/her own life expectancy for the calculation of the distribution.

SPOUSE CAN ROLLOVER THE DECEASED PARTICIPANT'S FUNDS
The final regulations clarified that a surviving spouse may rollover the participant's funds into their own IRA or Qualified Plan, less the required minimum for the year. Check out our spouse beneficiary article for further details.

NAMING A BENEFICIARY WHO IS NOT A PERSON
Under the final regulations, naming an institution, charity, the estate as a beneficiary is the same as having "no beneficiary”. Therefore, the 5-year rule will apply and the participant's remaining assets must be distributed within 5 years. Naming a “trust” as beneficiary may permit the individual trust beneficiaries to be treated as the named beneficiaries, if the appropriate rules are followed.

A 2004 IRA REPORTING ISSUE

IRA RMD REPORTING REQUIREMENTS MODIFIED AND DEFERRED
Starting in 2004, the Form 5498 (Box 11) must reflect that the IRA-owner was required to take an RMD. However, the amount of the RMD is not reported to the IRS. As of January 31, 2003, for the 2003 tax year, the IRA Trustee/Custodian/Issuer had to begin sending a report to the IRA-owner that either indicates the RMD amount or informs the owner that an RMD is required and that the RMD amount is available upon request. The revised reporting and notice requirements are found in IRS Notice 2002-27.

Bill Grossman, QPA