The Internal Revenue Service's new distribution rules for individual retirement accounts are certainly cause to rejoice. Beneficiary designations can now be changed beyond age 701/2 or after the required beginning date (RBD). Beneficiary choice no longer impacts the size of the account holder's minimum required distribution (MRD). Accounts no longer need emptying after the death of the owner. Whoopee!
Yet amid the hoopla, misconceptions and half-truths about the new regs, which were promulgated by the IRS on January 11, have swirled around the advisory profession. One common fallacy is that a single table now governs all IRA withdrawals. Nah. The IRS' new Uniform Distribution Table is generally applicable only to lifetime distributions. (The only post-death distributions calculated pursuant to the uniform table are those for a spousal rollover, i.e., when a surviving spouse elects to treat the deceased's IRA as his or her own.)
Moreover, during their lifetimes, not all account holders must use the uniform table to calculate the minimum required distribution. When the beneficiary is a spouse who is more than 10 years younger than the IRA owner, the minimum distribution may be based on the joint lives of the spouses (consult the joint-life expectancy table in the IRS' Publication 590) if the spouse was the sole beneficiary on the account for the entire year, says Jonathan Sard, an advisor with Financial Alternatives in Atlanta. In such cases, the MRD will be lower than what you would get by using the uniform table.
Another fantasy is that using the new uniform table always yields a lower minimum distribution than the old rules would have produced. Again, not true. The Uniform Distribution Table is simply the old Minimum Distribution Incidental Benefit Table with a new name. (It needed one.) Therefore, clients who had been using the MDIB table under the old law-those with nonspouse beneficiaries 10 or more years their junior, as well as clients who had selected the joint-life/recalculation method when a spouse 10 or more years younger was the designated beneficiary-will not see reduced distributions under the new rules, according to Rockville Centre, N.Y., CPA Ed Slott.
Perhaps the most misunderstood aspect of the new distribution regulations has to do with beneficiaries. Yes, the regs read "the designated beneficiary is determined as of the end of the year following the year of (the IRA owner's) death" (emphasis added). But that doesn't mean the estate executor, surviving spouse or any other party can willy-nilly add Joe Blow to the beneficiary roster, says Marvin Rotenberg, national director of retirement services at Fleet Private Clients Group in Boston. Nor can anyone change the primary or contingent beneficiaries that had been named by the deceased.
Rather, the IRS' language means it won't look to see who the beneficiary is (which impacts the account's post-death distributions) until December 31 of the year following death, Rotenberg explains. Any beneficiary eliminated prior to that date is disregarded by the IRS.
For example, say a charity is on the account as co-beneficiary with junior. Cashing out the 501(c)(3) nonprofit organization for its piece of the IRA pie (now an IRS-sanctioned act) leaves the child as sole beneficiary. Similarly, when the surviving spouse is the primary beneficiary and the contingent beneficiary is the child, if the wife disclaims by December 31 of the year after death, the child is the account's beneficiary in the IRS' eyes, says Rotenberg.
Under the new rules, designated beneficiaries can take post-death distributions over their own lives, even when advancing to primary-beneficiary status by reason of disclaimer. (Contrast that with a previous regulation, which required using the life expectancy of the person-frequently an older parent-who disclaimed.) The short of it is that contingent beneficiaries, when properly listed on the IRA, now make it easy to shuffle inheritors after the account owner passes away, even if the death was last year.
Disclaimer planning is therefore much more important now, says Robert S. Keebler, a CPA and principal of Virchow, Krause & Co. LLP, a Green Bay, Wis., CPA firm that does financial planning. "The issue that you really need to address is who is the contingent beneficiary," he says.
Consider the post-RBD IRA owner who had, under the old regs, designated a child as beneficiary to take smaller required payouts (even though naming the spouse, so as to leave her assets to live on, might have been preferable). The new rules provide a cleanup strategy, Keebler says.