Are You 70½ or Older?

New simplified rules are now in place for the Required Minimum Distribution (RMD) calculation. The following information provides details on these changes:

Revised IRA RMD Form

If you are the owner of a Traditional IRA, you must start taking distributions from your IRA by April 1 following the year in which you reach age 70½. All distributions thereafter must be taken no later than December 31 of each year.

Download the following IRS-required form for designating these distributions. Upon completing the form, please mail it to Evergreen Service Company, P.O. Box 8400, Boston, MA 02266-8400.

Required IRA Distributions at Age 70½ Payment Form [DOC 230K]

Back to top

Now the IRS lets you keep more money

Every owner of a Traditional IRA or retirement plan will be faced with taking a Required Minimum Distribution (RMD) from his or her plan at age 70½. New simplified rules from the IRS allow you to take a smaller RMD and keep more of your money invested in your tax-deferred IRA. In addition, the new rules include changes in the designation of beneficiaries and in the flexibility allowed beneficiaries.

The most significant change is the way in which the RMD is calculated.

Under the old rules you had to decide from a number of methods for calculating the RMD and, once distributions started, changes were not permitted. The new regulations provide a simple calculation method and a revised Uniform Distribution Period Table to determine your RMD. The new method allows for longer life expectancy, which usually results in reduced RMDs and an extended payout.

Back to top

For example, at age 75, under the old rules, the life expectancy factor was 12.5, allowing the IRA to be paid out over 12.5 years. On an IRA worth $100,000 the required RMD would have been $8,000 per year. Using the new table, the life expectancy, or payout period, is 22.9 years. The resulting RMD is only $4,366 per year, a significant $3,634 less. A taxpayer in a 30% tax bracket, under old rules, would pay taxes of $2,400 on the distribution. Under the new rules only $1,090, a tax savings of over $1,300.

Another change is in the beneficiary(ies) designation.

Under the old rules, the beneficiary(ies) must have been designated before the RMD was started and, once started, the payout period could not be lengthened. In some situations the amount of the RMD established by the owner had to be continued, or accelerated, by the beneficiary(ies). The new rules allow the beneficiary(ies) to be chosen at any time and the payout schedules, in most cases, are not dependent upon the beneficiary(ies) age. After inheriting the IRA, the beneficiary, whether a spouse or not, can take the RMD based on his or her age.

Back to top

Under certain guidelines a spouse or designated beneficiary(ies) now has the opportunity to disclaim the account, allowing the account to be passed onto a contingent beneficiary, such as a child or grandchild. In a situation in which the primary beneficiary(ies) has sufficient retirement resources, the account could be passed onto a younger beneficiary(ies) who could get more value from the account by stretching the RMDs over a longer period.

This change is significant for estate planning. Often owners of a retirement account want to pass the assets onto children, grandchildren, and/or other beneficiaries. Under the new rules, there is greater flexibility in managing the passage of the account to contingent or to multiple beneficiaries. These rules require some thoughtful consideration be given to estate planning.

Reporting obligations have also changed.

Previously IRA trustees and custodians – banks, investment companies, and/or mutual fund companies – were under no obligation to report RMD amounts. These trustees and custodians will now be required to report these amounts to the owner and to the IRS. It will now be important to take the correct minimum amount to avoid penalties.

Because of the investment and estate planning implications of the new rules, an account owner should consult a Financial Advisor. Your Financial Advisor can explain how these new rules can be best used to you or your heir's advantage.

Back to top

Comparison of Old and New RMD Rules

Old Rules New Rules
1.IRA owners were required to choose a calculation method for determining their annual RMD based on complicated and confusing factors. 1.IRA owners follow a simple, uniform life expectancy table based on the owner's current age to determine a generally significantly smaller RMD.
2.Custodians/trustees were required to report only the amounts an IRA owner withdrew. 2.Custodians/trustees are required to report both the amount withdrawn as well as the calculated RMD to both the IRA owner and the IRS.
3.IRA owners were locked into the distribution methods they chose. If the IRA owner chose to recalculate the life expectancy each year and did not have a designated beneficiary(ies) by the required beginning date, then the entire balance was immediately taxable to the beneficiary(ies) (if not a spouse) when the IRA owner died. 3.IRA owners may make immediate changes to their distribution choices.
4.The choice of or change in beneficiary(ies) could alter the RMD amount. 4.Beneficiary changes no longer impact RMD amounts.Also, following the death of the IRA owner, current designated beneficiaries for determining death distributions may be changed through elective cash-outs or disclaiming options.
5.IRA distributions to beneficiaries following the death of the IRA owner were paid out according to a strict timeline, often resulting in enormous tax bills that depleted the savings by more than half. 5.RMDs to beneficiaries following the death of the IRA owner are calculated based on the age of the beneficiaries or the deceased whichever is longer. In most cases the RMD will usually be less than the RMD for the account holder. Additionally, assets may be disclaimed to children and then grandchildren, or divided into separate accounts for multiple beneficiaries.

 

Back to top

Uniform Distributions Period Table

The new Uniform Distribution Period Table is used for RMD calculations. All IRA account holders must use the new table, with the exception of IRA account holders with spousal beneficiaries who are more than 10 years younger than the account owner. These clients may choose to use the Joint Life Expectancy Table to determine their RMD. This table can be found in IRS Publication 590, which can be accessed through the Internal Revenue Service Web site.

To determine the RMD, the IRA owner (or financial institution that is trustee of the account) divides the total market value of the IRA on December 31 of the previous calendar year by the Life Expectancy Factor determined from the Uniform Distribution Period Table.

Your Age

(Account Owner)		Life Expectancy

Factor		Your Age

(Account Owner)		Life Expectancy

Factor
7027.48018.7
7126.58117.9
7225.68217.1
73
24.78316.3
7423.88415.5
7522.98514.8
7622 88614.1
7721.28713.4
7820.38812.7
 7919.58912.0

 

Back to top

Sample RMD Calculations

Robert Thomas turned 70½ on November 3, 2003. What was Robert's Required Minimum Distribution for 2003?

Old RMD Calculation New RMD Calculation
Robert chose the recalculation method based on single life expectancy on his required beginning date. These choices are irrevocable. Robert did not need to make a decision on calculation method or joint vs. single life expectancy on his required beginning date.
1.Value of Robert's Retirement Plan (as of December 31,2002)$25,000 1.Value of Robert's Retirement Plan (as of December 31,2002)$25,000
2.Life Expectancy Factor From Robert's age as of December 31, 2003, determine the Life Expectancy Factor from the Single Life Expectancy Table.16.0 2.Life Expectancy Factor From Robert's age as of December 31, 2003, use the new Uniform Distribution Period Table to determine the Life Expectancy Factor.27.4
3.Robert's year 2002 RMD Divide line 1 by line 2.$1,562.50 3.Robert's Year 2002 RMD Divide line 1 by line 2.$912.40

 

Note that the new RMD calculation method is simpler than the old method and the resulting RMD is lower using this new calculation. Keep in mind that Robert may take more than his RMD of $912.40, allowing him greater flexibility on how to manage his finances.

The information provided does not constitute tax advice. Please consult your tax advisor or attorney for assistance with tax or estate planning.

Back to top