AIP History Center Newsletter
Volume XXXIII , No. 1, Spring 2001


Friends of the Center for History of Physics

Proposed Internal Revenue Code Regulations Will Improve Flexibility in the Use of Individual Retirement Accounts

Many scientists approaching their septuagenarian years view distributions from IRAs as a welcome addition to their retirement income. However, for those who have designated spouses, children, and other dependents, the old rules regulating the disbursements of these accounts were complex. As physicists seem to age more slowly than the average population that forms the basis of actuary tables, some have worried that their longer life expectancies are not accounted for in the calculations for minimum mandatory distributions, thus requiring them to draw out more and adding to their taxable income base.

The Treasury Department has issued several proposed regulations that provide a much simpler and more flexible method to allocate mandatory distributions that become functional after age 70½ and (hopefully much later) on the death of the account owner. These simplifications have the effect of reducing the required minimum distributions for the vast majority of account owners and their beneficiaries. This is good news for those who have done well in managing their finances, as a lower minimum distribution may reduce their overall taxable income.

With the proposed regulations, a simple, uniform table (titled the Uniform Distribution Period) can be used by all account owners to determine the minimum distribution required during their lifetime. The minimum distributions are based solely on the account owner's age and their account balance as of the end of the prior year, which IRA trustees report annually to IRA owners. (There is a special exception: if the account owner has a spouse who is more than 10 years younger, the actual joint life expectancy of the account owner and spouse may be used instead of the Uniform

Distribution Period.) This change can lengthen the lifetime distribution period for most account owners and their beneficiaries. In fact, the new proposed regulations would lengthen that period more for many individuals than would an update of the tables to reflect recent increases in longevity.

Because the new table used to calculate the required minimum distribution is based on the account owner's age, account owners would not need to determine their beneficiary by the required beginning date of their mandatory distributions since the beneficiary's life expectancy is irrelevant to the lifetime distributions of the account owner. This new flexibility in calculating distributions also allows the account owner to change designated beneficiaries after the required beginning date without increasing their required minimum distribution. The beneficiary must be determined no later than December 31 of the year after the year of the account owner's death. The beneficiary may be changed after the account owner's death, for example when charities are cashed out early before the distributions to other designated beneficiaries begins, thus no longer affecting their distribution period.

Most likely many account owners will name their surviving spouse as the beneficiary. Sometimes it makes more sense to name others who are much younger, such as grandchildren, as beneficiaries. The proposed regulations allow that the age of the oldest beneficiary be used in calculating the payout. In this case, the age of the oldest grandchild would be used (instead of the age of the account owner when they die), thus allowing for disbursement of smaller amounts over a longer distribution period.

An odd situation may arise if the beneficiary is older than the account owner. Minimum mandatory distributions would then have to be made based on the elder beneficiary's age, resulting in a much more rapid payout than if based on the account owner's life. As a planning strategy, one can name a charity as a co-beneficiary so that the payments could be extended over a longer time frame.

The proposed regulations help account owners who wish to name charities as beneficiaries because it becomes much more easy to name a charity as a beneficiary of part or all of a person's retirement account without accelerating distributions over the lifetime or after death of the owner. The minimum distributions are the same, regardless of whether a charity is named. At the end of the calendar year of the account owner's death, the charity may be paid their share of the account, and the remaining non-charitable beneficiaries will have greater flexibility on their distributions that can be named afterwards. This strategy permits the charity to benefit from part of the IRA without disrupting other beneficiaries.

The White House issued a hold on these and other proposed regulations, but it seems unlikely that the proposals will be seriously delayed or revoked. Of course, as in all planned giving and investment decisions, you should seek consultation from your financial planner, tax advisor, or IRA representative.

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