An IRA owner must take distributions that exceed the required minimum distribution (RMD) beginning no later than April 1 of the year following the calendar year in which the owner turns 70 As. Failure to take the required distribution for a year results in a penalty of 50% of the excess of the RMD for that year over the amount acutally taken.

Distribution Options

The final IRS regulations issued on April 16, 2002, apply for determining the RMDs for calendar years beginning after 2002, but taxpayers have a choice among three options in determining 2002 RMDs:

Individuals will usually achieve lower RMDs with the final regulations than with the 1987 or 2001 proposed regulations, because the final regulations updated the Life Expectancy Table to reflect longer life expectancies. The new tables for RMD apply where the age differential between the participant and the participant’s spouse and sole beneficiary is not more than 10 years. When the age differential between the participant and the participant’s spouse and sole beneficiary is more than 10 years, a longer distribution period may be chosen from the joint life expectancy tables. An owner can change beneficiaries as often as desired.

Under the 2002 final regulations, the final determination of the beneficiary of the IRA must be made no later than September 30 of the year following the calendar year of the owner’s death. This was changed from December 31 in the proposed regulations to provide enough time to calculate minimum distributions, which must generally begin by Decem-ber 31 of the year following death. Postmortem planning opportunities, such as beneficiary disclaimers of interest and buyouts of certain beneficiaries (e.g., charities), are possible between the owner’s death and the September 30 date, enabling the remaining beneficiaries to stretch out their IRA distributions over a longer period than allowed when an IRA beneficiary is not an individual.

The rules for distributions after the death of any IRA owner, however, depend on whether the IRA owner had begun to receive distributions before death. If the IRA owner has begun to receive distributions and dies before the entire balance is distributed, the regulations require that the remaining balance must be distributed over the life expectancy of the beneficiary or the remaining life expectancy of the IRA owner, whichever is longer. If the IRA owner dies before distributions begin, either 1) the entire account must be distributed within five years of the IRA owner’s death, if there is no designated beneficiary; or 2) any portion of the account payable to or for the benefit of a designated beneficiary must be distributed, beginning within one year of the IRA owner’s death, over the life expectancy of the beneficiary.

There are special rules if the beneficiary is the IRA owner’s spouse. If an IRA owner’s surviving spouse is the sole beneficiary, he can elect to treat the spouse’s entire interest as his own account. If a surviving spouse elects to treat the decedent’s IRA as his own, the RMD for the calendar year of the election and each year thereafter is determined by treating the surviving spouse as the owner. A surviving spouse can appoint a beneficiary of his own IRA.

If a surviving spouse inherits an IRA, she can generally roll it over into an IRA in her name or elect to treat the decedent’s IRA as her own. If someone other than the surviving spouse inherits an IRA, they cannot roll it over; they must withdraw the IRA assets within a certain period.

For estate planning purposes, if the estate exceeds the $1 million exclusion amount and the surviving spouse is the sole beneficiary of the IRA, then estate taxes can be reduced through the marital deduction. The surviving spouse will reduce her estate tax by electing to treat the inherited IRA as her own and receiving distributions from it.

If the beneficiary of the IRA is someone other than the spouse, one or more beneficiaries could disclaim their interest so that the IRA flows to a younger person, thus stretching out the distributions over a longer period. If the IRA has several beneficiaries, those beneficiaries can split the IRA into multiple IRAs with a single beneficiary for each, or leave the IRA intact but create separate shares for each beneficiary. Either option will allow each beneficiary to take distributions using his own life expectancy. If the IRA is not split, the RMD is based upon the life of the oldest beneficiary.

If no beneficiary is designated, then the estate becomes the beneficiary. The estate is not required to distribute the IRA to the estate beneficiaries; however, the estate must satisfy the five-year distribution rule if distribution had not begun as of the date of death.

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©2003 CPA Journal. Legal Notices