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New Rules for Retirement Distributions

On January 17, 2001, the Internal Revenue Service issued proposed regulations which have a sweeping impact on the way funds can be distributed from Individual Retirement Accounts (IRAs) and other qualified plans. Previously, complicated rules restricted how and when distributions had to be taken out of an owner’s account, both before and after reaching age 70 ½, the owner’s “Required Beginning Date,” as well as at death.

Simpler Life Expectancy Tables Should Reduce Required Distributions

The new rules make it much easier to determine an account holder’s required minimum distributions.

You can now use a simple, uniform table to determine distributions. Use of this table should reduce the minimum required distributions in most cases since it represents the joint life expectancy of a participant age 70 or older and a beneficiary ten years younger than the participant. For example, a 70-year-old participant and a 60-year-old beneficiary will have an assumed life expectancy of 26.2 years.

Greater Flexibility in Selecting and Changing Beneficiaries

There is no longer a need to decide whether or not to recalculate life expectancies.

There is no longer a need to determine a beneficiary by the Required Beginning Date.

You are no longer “locked in” to a beneficiary designation. You can change your beneficiary after the Required Beginning Date without increasing the required minimum distribution.

Deferral Opportunities

If the participant’s death occurs after the Required Beginning Date, the benefits are distributed over the life expectancy of the designated beneficiary, or if no beneficiary is designated, over the remaining fixed term life expectancy of the participant at the time of the participant’s death.

In some circumstances, the beneficiary can be changed after your death to take advantage of maximum deferral opportunities.

Charitable Giving

The ability to leave funds to charity has been simplified.

The Bottom Line

For most IRA owners and plan participants, the changes will have the effect of reducing the required minimum distributions, thereby increasing the amount that you can accumulate for your heirs. The rules also provide increased flexibility in your choice of beneficiary. Therefore, recommendations which may have been made for you regarding the beneficiary of your account and the approach for withdrawing the minimum amount from your account may be affected by the new regulations.

Effective Date

For IRA owners, the new rules are effective immediately. Qualified plan participants cannot use the new rules until their plan is amended.

Questions?

Please feel free to call or email us to discuss how this change in the rules may impact your estate plan.

Leonard Leader, Chair
(203) 363-7602
lleader@wiggin.com

David P. Faulkner
(203) 498-4311

Charles C. Kingsley
(203) 498-4307
ckingsley@wiggin.com

John W. Barnett
(203) 498-4303
jbarnett@wiggin.com

Robert M. McAnerney
(203) 363-7608

Karen L. Clute
(203) 498-4349
kclute@wiggin.com

Mark E. Haranzo
(203) 363-7640
mharanzo@wiggin.com

Charles N. Schenck, III
(203) 498-4302

This Wiggin & Dana Client Advisory is designed to inform clients and other interested parties about certain recent developments in the law. The Client Advisory does not constitute legal advice, which can only be obtained as the result of personal consultation with an attorney. The information published here is believed to be accurate at the time of publication but is subject to change and does not purport to be a complete statement of all relevant issues.