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Summary of IRA Compliance Deadlines
 

There are several deadlines pertaining to IRAs that must be met and to which the IRS will make no exceptions. Because of the IRS' strict adherence to these dates, it is imperative that IRA owners and administrators meet these deadlines.

1. April 1st following the calendar year in which the owner reaches age 70 ½.

Distributions to the owner of a traditional IRA must begin no later than April 1 following the calendar year in which the owner reaches age 70 ½ . Reg. 1.408-8, A-3.

Subsequent distributions must be received by December 31st of the applicable distribution year.

If the owner receives his first required minimum distribution (RMD) on April 1st, and the following year's RMD by December 31st of the same year (as is required in the regulations), both distributions will be includible in that year's tax return. If the owner receives the first distribution in the year the owner reaches 70 ½, it is treated as the RMD for that year.

Example: John Jones turns 70 ½ on July 3, 2007. His RMD for 2007, must be received by April 1, 2008. For 2008, and subsequent years, he must receive his RMD by December 31st of that year. If John receives his 2007 RMD on April 1, 2008, both his 2007 and 2008 distributions are includible on his 2008 income tax return.

2. April 1st following the calendar year in which an owner retires after the owner reaches age 70 ½. When owner owns 5% or less of an employer that has a qualified plan.

Alternatively, the required minimum distribution (RMD) for an individual who owns 5% or less of the employer that has a qualified plan is generally April 1st of the calendar year following the later of the:

It is not clear whether retirement means a complete termination from employment, or whether some less drastic reduction of employment would be consider retirement for purposes of taking RMDs. Nor is it clear how many hours must be worked to avoid being characterized as retired.

The 5% rule is a wonderful planning tool for postponing RMDs after 70 ½ for an IRA owner who continues to work and transfers his IRA to an employer that is owned not more than 5% by him. The IRA owner must transfer his IRA to the employer's qualified retirement plan to be eligible for postponing his RMDs. Qualified employer retirement plans include, but are not limited to, defined benefit, defined contribution, pension and profit sharing plans.

Postponing RMDs until after 70 ½ is not available for an employee who is a 5 % owner with respect to the plan year ending in the calendar year in which the employee turns 70 ½ . Reg. 1.401(a)(9)-2, A-2(c) .

The I.R.C. defines a 5% owner as someone who owns more than 5% of the outstanding stock of the corporation; or stock possessing more than 5% of the total combined voting power of all stock of the corporation; or if the employer is not a corporation, any person who owns more than 5% of the capital or profits interest in the employer. I.R.C. § 416(i)(1)(B)(i). Someone who owns exactly 5%, is not a 5% owner, one must own more that 5% to be a 5% owner.

Employer and plan ownership by related parties is included in the IRA's owner's ownership which disqualifies many IRA owners who continue to work after 70 ½ from being 5% owners.

Postponing retirement, and consequently RMDs, by a number of years will result in increasing the value of the IRA account dramatically.

Example: John Jones was born on August 4, 1936 and turned 70 ½ on February 4, 2007. His required beginning date is April 1, 2008, but he has not retired. His IRA's account balance was $1,000,000 on December 31, 2006. Using the IRS' Uniform Lifetime Table (see below) the applicable distribution period (ADP) for someone who is his age, 71, is 26.5. John's 2007 RMD would have been $37,736 ($1,000,000 / 26.5) but he is not required to take any RMDs because he transferred his IRA to his employer's pension plan, is not retired, and does not own more than 5 % of his employer. Instead, John's account will continue to grow until he retires and has to begin taking his RMDs.

3. Sept. 30th following the year of the IRA owner's death.

The Code defines a designated beneficiary as any individual who is designated as a beneficiary by the owner. I.R.C. §401(a)(9)(E). A designated beneficiary must be identified either by the owner or by the terms of the plan, but not every beneficiary is a designated beneficiary for purposes of retirement plan death benefits.

Beneficiaries designated as of the owner's date of death and who remain beneficiaries as of September 30th of the calendar year following the calendar year of the owner's death, are the IRA beneficiaries.  Reg. 1.401(a)(9)-4, Q&A-4.  

Beneficiaries who receive their entire interest (cashing out) by September 30th of the calendar year following the calendar year of the owner's death, are not taken into account as IRA beneficiaries. 

Beneficiaries who disclaim within nine months after the IRA owner's death are also not taken into account as IRA beneficiaries. 

4. December 31st of the year after the IRA owner's death.

Distributions to the owner of a traditional IRA must begin no later than April 1 following the calendar year in which the owner reaches age 70 ½ . Reg. 1.408-8, A-3.

Subsequent distributions must be received by December 31st of the applicable distribution year.

5. October 31st of the year after the death of the IRA owner.

A trust's beneficiaries may qualify as designated beneficiaries if the trust complies with various rules, including providing documentation, as described in §1.401(a)(9)-4, A-6 , to the plan administrator.

By October 31 of the calendar year immediately following the calendar year in which the owner died, the trustee of the trust must either;

(1) provide the plan administrator with a final list of all beneficiaries of the trust (including contingent and remaindermen beneficiaries with a description of the conditions on their entitlement) as of September 30 of the calendar year following the calendar year of the owner's death; certify that, to the best of the trustee's knowledge, this list is correct and complete and that the requirements of paragraph (b)(1), (2), and (3) of §1.401(a)(9)-4, A-5 of this section are satisfied; and agree to provide a copy of the trust instrument to the plan administrator upon demand; or

(2) provide the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the owner under the plan as of the owner's date of death,

in order to satisfy the documentation requirement of §1.401(a)(9)-4, A-6 for required minimum distributions after the death of the owner,

6. December 31st value of IRA account and age of the IRA owner.

Required minimum distributions (RMDs) are calculated annually by dividing the prior year-end account balance by a life expectancy factor, also referred to as the applicable distribution period (ADP):

RMD = prior year-end account balance / ADP

Account Balance
The account balance is determined for RMD purposes according to the type of account. IRAs are based upon December 31st of the calendar year immediately preceding the calendar year the distributions are being made. Reg. 1.408-8, A-6 . The account balance for a qualified plan is determined according to the account balance as of the last valuation date in the preceding calendar year. Reg.1.401(a)(9)-5, A-3(a) .

Age
The age used to determine ADP in the applicable distribution year is the age the IRA owner or beneficiary will be on December 31st of that year. Regs. 1.401(a)(9)-5, A-4(a)(b) ; A-5(c) . Normally, the deadline for taking RMDs is December 31st of the particular distribution year. However, for lifetime distributions, in the case of an IRA owner's first distribution year, the deadline is April 1st of the following year. Reg. 1.401(a)(9)-5, A-1(c) . The IRA owner must start taking distributions by that date to avoid penalties. If distributions are less than the required distributions for the year, the owner may have to pay a 50% excise tax for that year on the amount not distributed as required. IRS Publication 590, p. 54.

Example: Jane Jones was born on August 4, 1936 and turned 70 ½ on February 4, 2007. Her required beginning date (date RMDs begin) is April 1, 2008. She is the owner of her IRA that had an account balance of $500,000 on December 31, 2006. Using the IRS' Uniform Lifetime Table (see below) the applicable distribution period for someone who is 71 by December 31, 2007 is 26.5.

Jane's 2007 RMD is $18,869 ($500,000/26.5), and is required to be distributed to Jane by April 1, 2008.  Jane's RMD for 2008 is the account balance on December 31, 2007 divided by the Uniform Lifetime divisor for someone who is 72 and must be distributed by December 31, 2008.  In this example, Jane receives her 2007 and 2008 RMDs in 2008 and both distributions will be includible on her 2008 tax return.  There is a common misconception that the first required distribution year is April 1st of the year after the IRA owner reaches 70 ½ .  It is not.  The first required distribution year is the year the IRA owner reaches 70 ½ .  However, the regulations permit the RMD to be postponed to April 1st of the following year when the RMD for each of the first year and second distribution year is received in the second year.  Reg. 1.401(a)(9)-2, A-2.

For 2009, Jane's RMD is the account balance on December 31, 2008, divided by the Uniform Lifetime Table divisor for someone who is 73 and must be distributed by December 31, 2009.

7. Disclaimer deadlines.

While the qualified disclaimer rules appear to be quite straight forward, they can actually be very confusing when applying them to a specific situation. In particular, the date the disclaimer must be received by the transferor of the interest, his legal representative, or the holder of the legal title to the property is strictly construed and must be met. I.R.C. § 2518(b)(2).

For example, the deadline for a qualified disclaimer is 9 months after the later of the day on which the transfer creating the interest in such person is made, or the day on which such person attains age 21. The deadline for finalizing the identity of the designated beneficiary, for required minimum distributions (RMD) purposes, is September 30th of the year after the owner's death. The beneficiary identification finalization and RMD rules do not affect the deadline for making a qualified disclaimer and this can result in confusion and missed disclaimer deadlines.

In addition to meeting the requirements of I.R.C . § 2518, the disclaimer must also comply with applicable state law.


©2007 Leonard Gerstein LTD.

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