New Rules for Inherited IRA

On April 16, 2002, the IRS released the final regulations for the new rules for inherited IRA. The new rules for inherited IRA give inherited IRA beneficiaries a "fresh start".

Individuals who have to take a Required Death Distribution from an IRA must, beginning in 2003, change their method calculating the Required Death Distribution to match the final regulations.

This is true regardless of when or why the IRA beneficiary began their Required Death Distributions.

Distributions based on the final regulations may generally result in smaller amounts stretched out over a greater number of years. IRA Beneficiaries who wish to continue to use the old formulas may do so because they will be withdrawing more than the required minimum.

The IRA beneficiary is responsible for calculating and withdrawing their Required Death Distribution each year

IRA Beneficiaries may now use a new Single Life Expectancy Table

IRA Beneficiaries may now use a new Single Life Expectancy Table and calculate Required Death Distributions based on their own single life expectancy, non-recalculating.

The IRA beneficiary must be redetermined and the IRA beneficiary's life expectancy must be reconstructed to their age in the year following the IRA owner's date of death.

Reconstructing an IRA beneficiary's life expectancy results in a substantial change to the scheduled number of years clients can stretch-out payments and continue tax-deferred growth, and it dramatically reduces the amount of taxable income.

IRA Beneficiaries may switch to using the life expectancy rule

Also, IRA beneficiaries receiving distributions under the "5 Year Rule" may switch to using the life expectancy rule providing that any amounts that would have been required to be distributed under the life expectancy rule for all distribution years before 2004 are distributed by the earlier of December 31, 2003 or the end of the 5 year period.

The amount of the Required Death Distribution is determined by

• taking the IRA account balance as of the prior year end (December 31st value) and

   

• dividing it by the life expectancy factor of the beneficiary.