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Tax Newsletter
February 2001

Tax simplification - the real thing!

On January 11, 2001, the IRS released proposed regulations governing the manner in which distributions are made from retirement plans. The regulations dramatically simplify the manner in which distribution amounts are calculated.

The tax law provides rules for retirement distributions during an individual’s lifetime, as well as distributions occurring after death. The law prescribes rules for when distributions from retirement plans may (or must) commence. Significant penalties may be imposed for failure to make required minimum distributions. In general, distributions must begin no later than April 1 following the year the individual reaches age 70½ or retires (this is known as the “required beginning date”).*

Under existing regulations originally issued in 1987, the amount required to be distributed (the “minimum required distribution,” or MRD) is determined by a complex set of rules that place significant weight on certain choices made (or not made) by the individual.

The proposed regulations relieve individuals of much of the burden associated with making these choices and planning for retirement distributions. In addition, payout requirements under the proposed regulations will generally be less than those required under existing rules.

Changes related to lifetime distributions

Minimum Required Distribution (MRD). The proposed regulations simplify the procedures currently in place for calculating the MRD by providing a uniform distribution period for all individuals of the same age. Thus, there is a single table that prescribes the portion of a qualified plan that must be distributed each year. Most individuals will be able to determine their MRD for each year based on nothing more than their current age and their account balance as of the end of the prior year. An exception exists if the only beneficiary is a spouse and the spouse is more than 10 years younger than the individual. In that case, the individual is permitted to use the longer distribution period measured by the joint life and last survivor life expectancy of the individual and spouse.

Designation of Beneficiary. Under the 1987 regulations, the amount required to be distributed was dependent upon the age of the designated beneficiary. Thus, a change in the beneficiary designation would affect the manner in which the MRD was calculated. In addition, in the absence of a designated beneficiary, the payout period could default to a five-year period. Individuals were generally bound by beneficiary designations in effect as of the required beginning date.

Under the proposed regulations, distribution amounts are determined using a single table that is based on the individual’s age. As a result, beneficiary designations prior to the required beginning date do not have an impact on the payout computation. The proposed regulations also permit a beneficiary to be determined as late as the end of the year following the individual’s death. Thus, an individual may designate a beneficiary after the required beginning date. In addition, the beneficiary may be changed based on disclaimers or other planning events that occur after the individual’s death.

Changes related to distributions after death

For an individual who dies prior to the required distribution date and without a designated beneficiary, the proposed regulations permit minimum distributions to take into account the life expectancy of the individual as of his or her date of death. Under the 1987 regulations, in the event of the death of an individual before the required beginning date without a designated beneficiary, distribution of the balance in his or her account was required to be made by the end of the fifth year following the date of death. For an individual who dies after the required distribution date, the proposed regulations permit minimum distributions to take into account the life expectancy of the individual as of his or her date of death, in the absence of another designated beneficiary.

Planning opportunities

The IRS has scheduled a June 1, 2001 public hearing for comments on the proposed regulations, and anticipates that final regulations will be issued and apply for MRDs beginning in the 2002 calendar year. However, the MRDs for 2001 may be calculated using the new proposed regulations or the existing regulations. To the extent final regulations are more restrictive, they will be issued without retroactive effect.

Accordingly, the amount of required distributions for 2001 may be calculated under the old or newly proposed methods. Individuals who desire to minimize their required distributions may wish to make both calculations for 2001 and select the method resulting in the lowest required distribution.

Please feel free to contact us should you have any questions regarding clarification of the new regulations.

* For 5% of owners, the required beginning date is April 1st following the year an individual reaches age 70½. The provision regarding retirement is not applicable

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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