New IRA Beneficiary Distribution Regulations

In January 2001, the government released new proposed minimum distribution regulations for retirement assets, such as IRAs, and a minimum distribution life expectancy table (see our article IRA Minimum Distribution Table.) Also included in the new proposed regulations are beneficiary designations and distributions.

Minimum distributions must be made from retirement plan assets after the owner dies. Under the new regulations, if designated beneficiaries have been named, the life expectancy of these beneficiaries determines the required minimum distribution. A designated beneficiary must be an individual (spouse, child) or a qualified trust, but it cannot be an estate, a charity, or a non-qualified trust. In addition, a designated beneficiary is determined as of the end of the year after the IRA owner’s death.

Spouse as Beneficiary
After the owner’s death, the minimum distribution for the retirement plan assets is based on the surviving spouse’s life expectancy. The spouse may choose to treat the IRA as his/her own if the spouse is the sole beneficiary of the account. However, this does not apply if a trust is named beneficiary of the retirement assets with the spouse as sole beneficiary of the trust.

The spouse may roll over the post-death minimum distribution for a year if he/she establishes the IRA rollover in his/her name as IRA owner. If the surviving spouse is 70 ˝ or older, he/she must take the minimum distribution for a year, and that amount cannot be rolled over.

Non-Spouse Individual as Beneficiary
Anyone who is named beneficiary of retirement plan assets and is not the owner’s spouse may not roll over the assets into an IRA. If there is more than one beneficiary, the minimum distributions are based on the life expectancy of each beneficiary if the account is segregated. If more than one beneficiary exists, but the account has not been divided into separate accounts for each beneficiary, the minimum distribution is based on the life expectancy of the oldest beneficiary. A beneficiary may be able to use his/her life expectancy for minimum distributions if the amounts received are the result of a disclaimer.

Designated Trust as Beneficiary
Minimum distributions are based on the life expectancy of the oldest beneficiary (individual with the shortest life expectancy.) The exception to this is if a separate IRA exists and separate shares exist. In order for a trust to be treated as a designated beneficiary, the trust must be valid under state law, and it must be irrevocable. Furthermore, to be considered a designated beneficiary, the trust must clearly identify individuals as beneficiaries of the trust and proper identification is provided to the plan administrator.

Non-designated Beneficiaries
Non-designated beneficiaries of retirement assets include estates, charities, and non-designated trusts. If the owner of the retirement assets dies before his/her required beginning date for minimum distributions, minimum distributions to the non-designated beneficiaries is based on the five year rule, which requires the total account balance to be distributed within five years of the owner’s death. If the death of the owner of the retirement assets occurs after his/her required beginning date for minimum distributions, the minimum distributions to the non-designated beneficiaries is based on the IRA owner’s remaining life expectancy less one each year.

Conclusion
The new proposed IRA beneficiary regulations simplify the old proposals. These new regulations will have an impact on all owners of retirement plan assets, their beneficiaries, and ultimately, on how these assets are taxed.