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Feb 2001
01
February 01, 2001

Estate Planning Focus - Winter 2001

IRS Issues New (and Better) Rules Affecting
Retirement Plan Distributions

Many taxpayers are familiar with the minimum required distribution rules that establish and regulate the required minimum distributions from individual retirement accounts ("IRAs") and qualified plans, such as 401(k) and defined contribution accounts. The rules for determining the required distributions have been complex, difficult and frustrating. On January 11, 2001, the IRS released new proposed regulations that simplify the rules governing required distributions from these plans.

The new proposed regulations represent a significant improvement over the rules that have governed IRA and qualified retirement plan distributions for the past 13 years. Among the significant changes brought about by these rules are the following:

  • A simpler method now exists to calculate the required distributions during the lifetime of the IRA owner and plan participant.

     
  • These simpler rules are more favorable to most taxpayers, and will allow the IRA owner or qualified plan participant to distribute the assets in the plan over a longer period of years, thereby allowing more and longer income tax deferral.

     
  • The election to recalculate or not recalculate life expectancies of the IRA owner, plan participant or beneficiary has been eliminated, reducing confusion and simplifying the planning of the distribution requirements.

     
  • The age and identity of the beneficiary no longer controls distributions during the lifetime of the IRA owner or participant.

     
  • IRA owners and plan participants can change the beneficiaries after the "required beginning date" (for most people, April 1 of the year following the year in which the participant attains age 70), without adversely affecting the pace at which distributions are made from the account.

     
  • Most beneficiaries can now take distri-butions over their lifetimes, rather than within five years of death of the participant.

The IRS proposes to make these rules effective by January 1, 2002, and has scheduled a hearing on the rules on June 1, 2001. In the meantime:

  • For owners of IRAs, they may begin to rely upon the proposed rules immedi-ately, even to calculate their 2001 distributions. IRA owners may elect to continue determining their required minimum distributions under the existing regulations, although few will benefit from doing so.

     
  • For participants in qualified plans, they will need to wait until the plans are amended by the plan sponsor to take advantage of these new rules. The IRS has published a proposed model amendment for plan sponsors to adopt.

What to Do Next

Who can take advantage of these new rules and what should they do next?

  • IRA owners who are past their "required beginning date" (generally age 70), or who reached age 70 in 2000, or who will reach age 70 in 2001, should delay receipt of distributions from their IRAs for calendar year 2001 until they have consulted with their tax and/or estate planning advisor to discuss how the new proposed regulations will affect them. In most instances the new regulations will allow smaller distributions from the accounts or IRAs than was previously required.

     
  • Participants of qualified plans should contact their plan administrators to determine whether they can take advantage of these new rules (a plan amendment will be required).

     
  • Everyone should revisit his or her choice of beneficiary and consider whether to make changes.

     
  • Beneficiaries of IRAs or qualified plans should consider whether planning options exist and what steps can be taken that will permit longer term distributions of assets in a qualified plan or IRA.

If you have questions about these new regulations or need additional information, please contact Susan G. Meyers (616.752.2184), Mark K. Harder (616.396.3225) or your Warner Norcross & Judd LLP attorney.

Estate Planning Focus

Staff

Editor: Susan Gell Meyers

Trusts & Estates Group Chairman: Mark K. Harder

Estate Planning Focus is published semi-annually in the spring and fall by Warner Norcross & Judd LLP to inform clients and friends of new developments. It is not intended as legal advice. If you need additional information on the topics in this issue, please contact your Warner Norcross attorney or any member of the firm's Trusts and Estates Group.

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