Although it is hard to believe, the Internal. Revenue Service has changed the rules and they are generally in our favor and will result in a substantial loss of tax revenue for the Service. As any of you who have tried to understand all of the requirements have discovered, this is an area that was easily confusing. Much of that confusion has been eliminated. Here is a brief summary, including some things that have not been changed.
Required Beginning Date (RBD) for your IRA
This is the last date on which the owner of the IRA must start withdrawal of their Required Minimum Distribution (RMD). It is still before April 1 of the year following the year in which the owner reaches the age of 70 1/2. Remember that it may be beneficial to start taking the RMD in the year you reach 701/2 because waiting for the "year following" may require a double withdrawal at that time with its greater tax burden.
Required Beginning Date (RBD) for beneficiaries of an IRA
If the spouse is the beneficiary and does not roll it over into their own IRA, they can wait until they are 70 ½ if the owner had not reached their RBD, or if the owner had reached the RBD, then in the year of death, the decedent's minimum must be taken. Then, in both cases, the spouse can recalculate the amount to be taken based on their life expectancy.
If the spouse rolls the IRA into their own account, they have the same 70 1/2 age rules with which to comply.
For children or grandchildren who are beneficiaries there are some variations but the general rule is that they are now able to use their own life expectancy to determine the minimum amount they must withdraw unless the decedent had already reached their RBD in which case the first year withdrawal is based on the decedent's RMD and thereafter on the child or grandchild's life expectancy.
Another major change is that now, for a spousal beneficiary, the life expectancy is re-calculated every year. Because life expectancy drops less than one year every year, this means the withdrawal could continue well after the spouse reaches the age of 100.
This is different from the rule for children and grandchildren. There, once the life expectancy is determined for the first withdrawal, it is reduced by one each year. For example, if the child has a life expectancy of 30 years, all of the IRA must be withdrawn by the end of 30 years even if the child lives longer than that.
Another date to consider
December 31st of the year following death, or of the fifth anniversary year of death.
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The IRA can be divided into separate accounts for multiple beneficiaries
or a trust beneficiary can create subtrusts for trust beneficiaries if this is accomplished by December 31st of the year following the year of death.
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If the IRA goes to a non-designated beneficiary trust, a charity or the estate of the decedent, then all funds must be withdrawn by December 31st of the fifth anniversary year of the decedent's death.
Confusion we no longer have.
Before the new regulations, you had to make a choice of either using the joint life expectancy of spouses and staying with that decision, or choosing to recalculate each year. Now we recalculate each year for the owner of the IRA and, after their death, for some of the beneficiaries as discussed earlier.
Formerly, you had to make an irrevocable beneficiary designation prior to reaching 70 ½. Now it can be done
later with no penalty.
