by Patrick Matthews
© 2001, Brentmark Software, Inc. All Rights Reserved.
(The following article deals with the 2001 Proposed Regulations which were replaced by the 2002 Final Regulations which were published on 4/17/02. For details on the final regulations, see Required Minimum Distributions: Calculations under the Final Regulations.)
The new regulations released on 1/11/2001 radically change the way minimum distributions have to be calculated. They eliminate a lot of complexity and they reduce the number of decisions which must made by a plan owner. The distributions, however, still have to be calculated, and the new reporting requirements make calculating this distribution accurately even more vital than ever.
When calculating the new distributions, it’s important not to be confused by the old rules. The old recalculation options are no longer relevant. There is no "hybrid method" or "joint term certain method." However, the new methodology does still have some similarities to the old. For example, the distribution is still calculated by dividing the previous year's balance by a life expectancy number.
Here's how it works:
Situation 1: Owner still alive
If the owner is still alive, the distributions are based on the divisor found in the MDIB table for owner’s age. The MDIB table is a published table of joint life expectancies for an owner and a beneficiary who is ten years younger than the owner. It simplifies the calculation to only using the owner's age. No beneficiary information is needed, and no recalculation options are available. There is only one exception to this rule – for cases involving spousal beneficiaries that are more than ten years younger than the owner.
Situation 2: Owner dies with nonspousal beneficiary
When the owner dies with a nonspousal beneficiary, a term certain distribution period is established, based on the designated beneficiary's single life expectancy in the year after the owner's death. As with the old term certain method, this life expectancy is simply reduced by one for each year after it is calculated.
Situation 3: Owner dies with no beneficiary
This is the only situation where the owner's required beginning date is relevant. If the owner dies before the required beginning date, and there is no beneficiary alive as of 12/31 of the year following the owner's death, the five year rule applies – all the money has to be distributed within the next five years.
If the owner dies after the required beginning date, and there is no beneficiary alive as of 12/31 of the year following the owner's death, the distributions are taken out over a term based on the owner's life expectancy in the year of death. Once again, this works the same as the old term certain method, with the life expectancy being reduced by one for each year that passes after the owner's death.
Situation 4: Owner dies with spousal beneficiary
When the owner dies with a spousal beneficiary, the spouse gets special treatment. In this case, required distributions are generally based on the spouse's single life expectancy in each year after the owner's death.
If the owner dies prior to the calendar year in which he would have reached age 70˝, the spouse does not have to start taking distributions until that year. However, if the owner dies before 12/31 of the calendar year in which he would have reached age 70˝ and the spouse also dies before 12/31 of the calendar year in which the original owner would have reached age 70˝, then the second-to-die spouse is treated as the new owner with the rules of Situation 2 being applied if the second-to-die spouse has a designated beneficiary or Situation 3 if there is no designated beneficiary.
If the spouse dies after the year in which the original owner would have turned 70˝, the distributions become term certain, with the term set to the spouse’s life expectancy in the year of death. Again, this works the same as the old term certain method, with the life expectancy being reduced by one for each year that passes after the spouse's death.
When the owner dies with a spousal beneficiary, the spouse has the option of doing a spousal rollover with the spouse becoming the new owner. In such a case, the rules of Situation 1 apply after the spouse becomes the new owner.
Situation 6: The Exception to Situation 1
The exception to situation 1 is when there is a spousal beneficiary who is more than 10 years younger than the owner. In this case, the life expectancy used while the owner is alive is the joint life expectancy of the owner and spouse, recalculated in each year. Once the owner dies, the exception no longer applies, and the distribution is handled according to the situations described above.
As you can see, each of these six situations is fairly straightforward (except possibly for the spousal beneficiary case). Taken together, however, they still represent a fairly complicated set of calculations which have to be correctly performed to make sure you calculate the correct distribution for your clients.
For the latest information on Required Minimum Distributions, see the NewRMD.Com Web Site at www.newrmd.com.
Patrick Matthews is the Director of Software Development at Brentmark Software, Inc. He is also the founder of Live Oak Games.
Note: Print Reprint rights to this article are freely granted. However, you must contact us first to receive an acknowledgement that will grant you reprint permission. We also need to know where you would like to republish the article. We generally do not grant republishing rights on the Internet; however, you are free to link to this article even without prior permission.
253 Plaza Dr., Ste. B
Oviedo, FL 32765-6460
1-800-879-6665 or 407-306-6160