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Summary of Requirements for Minimum Distributions from Qualified Plans and IRAs

Distributions may be taken from a qualified plan without penalty at any time after the owner reaches age 59 ½. After reaching age 70 ½, however, certain minimum distributions must be taken. Regulations released by the IRS have liberalized the rules governing these requirements.

Minimum Distribution During Life of Owner

During the life of the owner, distributions must be taken each year once the required beginning date (RBD) is reached. The RBD is April 1 of the year following the year in which the owner reaches the age of seventy years and six months. There is a specified minimum amount the owner must withdraw each year. The owner can always withdraw more than this amount if the plan permits. The minimum withdrawal is based on a unisex table representing life expectancies published in the regulations and is based on the owner's age each year. For example, at age 70, the table specifies 26.2 years. At age 75, the period is 21.8 and at age 80 it is 17.6. To calculate the minimum required withdrawal, simply divide the account balance as of the end of the preceding year by the number corresponding to the owner's age. For example, if the owner is age 75 and the balance in his IRA account at December 31 of the previous year was $21,800, the owner would be required to withdraw a minimum of $1,000 for that year. The following year, the table amount applicable to age 76 would be used for the divisor. Unlike the previous rules, unless the owner otherwise elects, this is true regardless of whether the owner has designated a beneficiary or the age of that beneficiary.

The RBD may be changed by terms of the plan to start earlier (but not later) than the age 70 ½ rule. For example, if a company pension plan may require distributions to begin when the employee reaches age 65. In this case the distributions made before the RBD are ignored for purposes of calculating the required minimum distribution once that age is attained.

Minimum Distributions After Owner's Death

For years after the year of the owner's death, the minimum required distributions depend on whether the owner has designated a beneficiary of the plan and whether the owner died before or after reaching the RBD. If the owner dies before the RBD, the default rule requires that the balance in the account be paid out in equal amounts over the life expectancy of the designated beneficiary, beginning by the end of year following death. If the designated beneficiary is the spouse of the owner, the required beginning date may be postponed until the owner would have reached age 70 ½. If there is no designated beneficiary, the amount in the account must be fully distributed within 5 years of the date of death.

If the owner dies after minimum distributions have begun (after the RBD), the account must be paid out over the life expectancy of the beneficiary or, if there is no designated beneficiary, over the remaining life expectancy of the owner (as determined in the table) at the time of death.

Special Spousal Election

If the surviving spouse is the designated beneficiary, the spouse may elect to treat the decedent's IRA as her own IRA. If made, the election will result in the surviving spouse being treated as the owner. Thus, distributions need not be taken until the spouse reaches age 70 ½, rather than the date the decedent would have reached that age. Also, the surviving spouse may name his or her own designated beneficiaries.

Who is a Designated Beneficiary?

The owner (or the terms of the plan) may specify a designated beneficiary at any time prior to the end of the year following the year of the owner's death. This allows a beneficiary to disclaim an inheritance from a qualified plan or IRA. This also is a big difference from the prior rules under which a designated beneficiary had to be named before the RBD.

Only an individual may be a designated beneficiary. Thus, an estate or a trust is not qualified to take distributions over a life expectancy of a beneficiary. There is an exception for certain types of trusts. If a trust is a valid trust under state law, is irrevocable upon death of the plan owner, all the beneficiaries are identifiable and certain documentation is provided to the plan administrator (or IRA trustee), the trust may use the life of the beneficiary to determine minimum distributions. If there is more than one beneficiary, the shortest life must be used. A properly drafted trust can insure that the surviving spouse or another chosen individual is used as the measuring life.

QDROs

If the plan is subject to a qualified domestic relations order (QDRO) at the time of the owner's death, the ex-spouse's share of the account is treated separately for purposes of calculating the required minimum distribution. The ex-spouse is treated as the owner's current spouse for all other distribution purposes, such as beginning distributions when the owner reaches 70 ½.

Multiple IRAs

Generally, each plan and IRA stands on its own for purposes of calculating a minimum distribution. In the case of multiple IRA accounts, a minimum distribution must be calculated separately for each IRA based on its December 31 balance. However, the distributions may be aggregated and actually withdrawn from any one or more of the IRAs. This rule can only be used for IRAs and cannot be used for company sponsored plans such as 401(k) or pension plans. A distribution from a Roth IRA cannot be counted toward this distribution. It must be taken only from traditional IRAs.

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