New IRA Distribution Rules

The IRA distribution rules were finalized for 2002 and are better than before. IRA owners, plan participants and their beneficiaries will all benefit from the changes. Basically, the IRS kept the original framework. The changes in these Final Regulations are mainly simplifications and corrections to previous regulations based on comments received over the last year.

New Life Expectancy Tables

The IRS has issued new life expectancy factors for the three life expectancy tables that IRA owners and beneficiaries use to compute required minimum distributions. The three tables are the Uniform Lifetime Table, the Single Life Table and the Joint life Table. These tables can be viewed and downloaded from the individual links below. The tables have not been changed in the past 20 years, and the change in life expectancy is 1 additional year.

Uniform Lifetime expectancy Distribution Table

This is the table that will be used by most IRA owners and plan participants for figuring required distributions - normally after reaching age 70½. The only IRA owners who will not use this table will be those whose spouse is their sole beneficiary for the entire year and is more than 10 years younger (known as the "spousal exception"). Beneficiaries never use this table.

Joint Life Table

This table is used only for lifetime distributions and only when the spousal exception applies (when the spouse is the sole beneficiary and is more than 10 years younger than the IRA owner). Beneficiaries never use this table.

Single Life Table

This table is used by designated beneficiaries to compute required minimum distributions on inherited retirement accounts. This table will never be used to calculate lifetime required distributions. This table can also be used by designated beneficiaries to correct or change the distributions schedule they were locked-into under the old rules.

New Reporting Requirements

Beginning in 2003, custodians will have to report only to IRA owners and not the IRS. They can either give the IRA owners their required distribution amount or notify them that an amount is required and offer to calculate that amount upon the IRA owner's request. Beginning in 2004, the custodians will have to report to the IRS, those accounts that are subject to required minimum distributions but not the amounts.

New Date for Determining the Designated Beneficiary

In the Proposed Regulations from January 2001, the designated beneficiary was not determined until December 31st of the year following the year of the IRA owner's passing. That was also the date that the first required distribution was due on the inherited account which in some cases would leave little time to calculate and withdraw the required amounts. IRS has fixed this problem by advancing the date that the designated beneficiary is determined to September 30th of the year following the year of the IRA owner's passing. This will give beneficiaries and financial institutions an added three months to figure and withdraw required amounts. This does not mean that a designated beneficiary can be named after the passing of the IRA owner. All designated beneficiaries, both primary and contingent, must be named by the IRA owner while he is still breathing. Then, after passing of the IRA owner, the designated beneficiary can be changed, but only amongst the group of beneficiaries named by the IRA owner.

Death During the "GAP" Period

Since the designated beneficiary is not determined until September 30th of the year following the year of the IRA owner's passing, a so-called ""GAP" period is created. The gap period is from the date of death until September 30th of the year following the year of the owner's passing. This gap period concept was created by the 2001 Proposed Regulations, but it raised the question of what would happen if the beneficiary expired during the gap period. In other words, whose life expectancy would you use if the beneficiary expired before he became the designated beneficiary. The Final Regulations answer this question by stating that the life of the deceased beneficiary will be used if that beneficiary expires in the gap period. Without this clarification, the beneficiary could end up being the estate of the deceased beneficiary which would mean there is no designated beneficiary and the longer life expectancy could not be used.

An Estate is not a Designated Beneficiary

This makes naming a beneficiary crucial. If the beneficiary is named through a will or through state law, that beneficiary will not be a designated beneficiary and will not be able to use his life expectancy to stretch distributions on an inherited IRA. The life expectancy of an estate is zero because an estate is not a designated beneficiary.

Beneficiaries Can Switch to the New Rules

The Final Regulations contain a provision that will allow designated beneficiaries who inherited years ago under the old rules to switch to the new rules. Under the old rules many beneficiaries ended up using the 5-year rule which meant that the entire inherited account had to be withdrawn by the end of 5th year following the year of death. But now if those beneficiaries were named by the IRA owner as of his or her passing, they can switch to the life expectancy method based on the new tables. The one condition is that they have to take the distributions for the back years (if they have not done so already). Also, those beneficiaries that were named by the IRA owner as of his or her passing can switch to the new life expectancy tables even if they were not stuck with the 5-year rule, but were using another less favorable life expectancy method.

Multiple Beneficiaries

If you have named more than one beneficiary on a single IRA account, the general rule is that after passing, required distributions have to be based on the age of the oldest beneficiary. IRS has confirmed their position that if the accounts are split into separate IRAs, then each beneficiary can use his own life expectancy to compute required distributions. The account must be split by the end of the year following the year of the IRA owner's passing.

Spousal Exception

The spousal exception says that if your spouse is your sole beneficiary for the entire year and is more than 10 years younger than you, then you do not have to use the Uniform Lifetime Table for distributions and instead you can use the actual joint life expectancy from the joint life table. Many people asked what would happen if the spouse expired or got divorced during the year? The answer is a provision stating that the marital status will be determined as of January 1st of the distribution year. If the spouse expires or gets divorced during the year, you can still use the spousal exception for that year, but not for the following year.

Trust Documentation

In order for the beneficiaries of a trust that is named as your IRA beneficiary to qualify as designated beneficiaries, several requirements must be complied with. One of those requirements is to provide information on the trust beneficiaries to the plan administrator or IRA custodian or trustee. Under the new rules, that documentation must be provided by October 31st of the year following the year of the IRA owner's passing. Old trusts that did not qualify because of the documentation requirement, will now be given until October 31, 2003 to provide the required documentation.

72(t) Payment Schedules

The new rules apply to existing 72(t) payment schedules. The only people affected would be those who were using the Minimum Distribution method to calculate their 72(t) payments. If you were using that method, you can now switch to the new tables to compute future 72(t) payments and the switch will NOT be considered a modification by IRS. However, this will not apply to that many 72(t) payment schedules since most people don't use the Minimum Distribution Method because it produces the lowest payouts.

Decline in Account Value

There is a 50% penalty for not taking a required distribution. If the value of your IRA or plan has dropped so much that when you compute your required distribution based on last year's ending balance, your required distribution amount exceeds your entire account balance, then you can simply empty the account. The IRS won't require you to withdraw more than you have. You will not be subject to the 50% penalty for not taking the full amount of your required distribution.

Roth IRAs

Required distributions from Roth IRAs (which only applies to Roth IRA beneficiaries) are now subject to the 50% penalty for not taking a required distribution. The 50% penalty provision in the tax law omitted Roth IRAs. The IRS has fixed that in the Final Regulations, but the law still must be corrected by Congress.

Older Beneficiaries Can Use the Longest Life

If you die after your Required Beginning Date (after you reach age 70 ½) and your designated beneficiary is older than you, your beneficiary can use YOUR remaining life rather than their own. This will give them a longer life expectancy than their own.

You can download a complete copy of the Final Regulations as a Microsoft Word version below. These new rules are effective January 1, 2003. These rules apply to beneficiaries as well as IRA owners and plan participants.