June 1, 2005 - Required Minimum Distributions

Under final regulations issued in April, 2002, distributions from a traditional individual retirement account or annuity (IRA) must begin by April 1 of the year after the year in which the owner reaches age 70-1/2, whether or not the owner has retired. (IRA owners working beyond age 70-1/2 are not permitted to delay distributions until after retirement.) No minimum distribution is required during life from a Roth IRA.

Unless the owner’s entire interest is distributed on or before his required beginning date, distributions of the balance must begin by that date and must, at a minimum, be distributed over the time period set forth in the 2002 regulations, as explained below.

Final regulations issued in 2002 adopted simplified calculation rules first proposed in 2001 for lifetime distributions from individual accounts. In addition, the 2002 final regulations included updated tables that take into account longer life expectancies.

The 2002 regulations are effective for calculating distributions required for calendar years beginning on or after January 1, 2003; however for distributions required for 2002, taxpayers are permitted to rely on the 2002 regulations, the 2001 regulations, or the 1987 regulations.

Under the final regulations issued in 2002, required minimum distributions from an individual account under a defined contribution plan during the owner’s lifetime are calculated by dividing the owner’s account balance by the applicable distribution period determined from the following table:

The distribution required by April 1 is actually the distribution required for the year in which the owner attains age 70-1/2. Distributions for each calendar year after the year the owner becomes age 70-1/2 (including the year of his required beginning date) must be made by December 31 of that year.

For purposes of calculating minimum distributions from an IRA for a distribution calendar year, the account balance is determined as of December 31 of the immediately preceding calendar year.

If the IRA owner’s spouse is the only beneficiary of the owner’s entire interest at all times during the distribution year, the owner may receive distributions over the longer of the distribution period determined from the table above, or the joint and survivor life expectancy of the owner and spouse. If the spouse is more than 10 years younger than the IRA owner, the joint and survivor life expectancy will provide the longer payout period.

A designated beneficiary is an individual (or certain trusts) designated as a beneficiary, either by the terms of the IRA document or by an affirmative election by the IRA owner, or the surviving spouse. (Note, however, that for lifetime distributions, the identity and age of the designated beneficiary do not affect the IRA owner’s distributions unless the designated beneficiary is a spouse more than 10 years younger than the owner.

If more than one individual is named as beneficiary as of the date for determining the designated beneficiary, the one with the shortest life expectancy is used for calculating required minimum distributions.

IRA required minimum distributions that are made as annuity payments are calculated in the same manner under the 2002 regulations as required minimum distributions from defined benefit plans.

If an IRA owner dies before his required beginning date, distributions must be made under one of two methods:

• Five year rule: the entire interest must be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).
• Life expectancy rule: if any portion of the interest is payable to, or for the benefit of, a designated beneficiary, that portion must be distributed over the life (or life expectancy) of the beneficiary, beginning within one year of the owner’s death.

If the owner of an IRA dies on or after distributions have begun (i.e., generally his required beginning date), but before his entire interest in the IRA has been distributed, the Code states that the entire remaining balance must generally be distributed at least as rapidly as under the method of distribution in effect as of the owner’s date of death.

Under 2002 regulations, if the IRA owner does not have a designated beneficiary his interest is distributed over his remaining life expectancy, using the age of the owner in the calendar year of his death, reduced by one for each calendar year that elapses thereafter.

A surviving spouse of an IRA owner who is the sole beneficiary of an IRA and who has an unlimited right to make withdrawals for the IRA may elect to treat the entire account as his or her own IRA. This election can be made at any time after the IRA owner’s death; however, to make the election, the surviving spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA.

Any minimum distribution that was required to be made to the deceased owner, but had not been made to him before his death must be made to the surviving spouse in the year of the death, but in all other respects, required distributions after the owner’s death are determined as if the surviving spouse were the owner.

Source: Tax Facts 2004, National Underwriter Company