Proposed Treasury regulations released in mid-January [ 2001] greatly simplify computations for required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs. These are distributions generally commencing at age 70-1/2 which are sufficient to avoid a 50% penalty on underpayment. The new rules are slated to be effective starting on January 1, 2002, but can be used for distributions in 2001.
Lifetime distributions. Distributions are figured using a uniform table that assumes a joint life expectancy with the individual and a beneficiary who is 10 years younger regardless of the beneficiary's actual age or whether in fact there is any beneficiary. Exception: The actual joint life expectancy can be used if a designated beneficiary is a spouse who is more than 10 years younger than the individual. The simplified distribution method replaces the former choices of the term certain method, recalculation method and the hybrid method.
Post-death distributions. Distributions after death of benefits remaining in accounts to designated beneficiaries generally are figured over their life expectancy. Surviving spouses who inherit IRAs still have the option of rolling them over and treating them as their own accounts.
Beneficiary determination. The determination of who is the designated beneficiary need not be made until the last day of the year following the year of death. This means that no designation is necessary when commencing required minimum distributions. Also, post-death actions, such as disclaimers by beneficiaries, can be used to determine beneficiaries.
Figuring RMDs. IRA custodians will be required to compute RMDs for the following year when providing year-end account balances.
IRA owners. The new rules can be used to figure RMDs in 2001-even if another distribution method has been used in the past.
Employer perspective. Qualified retirement plans will have to be amended to comply with the new rules. A model amendment in the proposed regulations can be used for this purpose.
Caution: The rules are only proposed regulations which have not yet been finalized. Both individuals and employers should consult with retirement plan professionals to determine their actions for the current year.
BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row. @barbaraweltman