ShareThisBy ALAN S. NOVICK
Sunday, November 05, 2006
We continue this week to look at Individual Retirement Accounts with a particular focus on rules governing distribution of funds.
The basic IRA distribution terms are the required beginning date (RBD), the minimum required distribution (MRD) and the "first distribution year" (no acronym).
New IRA distribution rules greatly simplify the determination of how much of a distribution must be taken each year. Figuring out when the distributions must start is more complicated. There is a difference between determination of the amount of the MRD and establishing the required beginning date. There is also a difference between the first distribution year and the RBD.
Under plans subject to the lifetime MRD rules, the "first distribution year" is the year the participant reaches age 70 1/2 _ or, in some cases, retires. The RBD is the latest date that the first distribution must be made. The starting point for determining the RBD is the attainment of age 70 1/2, which is "the date six calendar months after the 70th anniversary of the employee's birth. If the participant's birth date is Dec. 31, 1935, it is not clear whether he attains age 70 1/2 on June 30, 2006, or July 1, 2006, but it doesn't matter because either way he attains age 70 1/2 in calendar year 2006 and his age on his 2006 birthday is 71.
Normally, the deadline for taking the MRD for a particular distribution year is Dec. 31 of such year, but for lifetime distributions only, in the case of the first distribution year, the deadline is April 1 of the following year _ not Dec. 31 of the first distribution year. The difference between the first distribution year and the RBD can produce odd effects. The participant can therefore postpone his first distribution until April 1st of the next year. If he takes advantage of the permitted postponement, and delays his MRD for the first distribution year until the following year, he will have two MRDs in the second distribution year. The two MRDs in the second year will have different deadlines, be based on different account balances, and use different life expectancy calculations.
Take note that Roth IRAs have no RBD. The participant is never compelled to take distributions from his Roth IRA. He has paid the income tax on the amount in the Roth IRA when it was set up. Minimum distribution requirements do not apply to a Roth IRA until after the participant's death.
For "traditional" (nonRoth) IRAs, the RBD is April 1 of the calendar year following the year in which the participant reaches age 70 1/2, regardless of whether he is "retired." There is a different RBD for certain rollover contribution. That final deadline for the first year's MRD is called the "required beginning date" or RBD. This postponement of the MRD for the first year does not apply to death benefits, or to the first MRD triggered by a rollover contribution.
The RBD matters mainly for compliance purposes: The participant must start taking MRDs by that date to avoid penalty, and the calculation of post-death MRDs is different depending on whether death occurred before or after the RBD. The RBD has little significance for planning purposes.
As noted, the timing of the first IRA distribution can produce two required distributions in one year if the first distribution is postponed until the April 1 deadline. The disadvantage is that there are two distributions in one year with income taxes due on both. If the first year distribution is taken in the first year before December 31st, then there is only one tax on that year's distribution and no doubling up. The advantage of the postponement and doubling up is that the tax is deferred and the assets in the IRA grow until distributed by the April 1st deadline.
The IRA plan administrator should be able to provide the participant with a tax and income analysis of his choices for the first year's distribution. The participant can then decide if postponement and doubling up is worthwhile.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304(at)aol.com.)
