Retirement savings: Pending rules require banks to update procedures for IRAs and qualified plans

Northwestern Financial Review, Jul 1, 2001 by Tacik, Greg

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A long awaited regulation change finally became reality in January for IRA owners and qualified plan participants when the IRS issued a much-simplified set of regulations on required minimum distributions (RMDs). These distributions generally are required when an IRA owner or qualified plan participant attains age 70 and a half. The new rules will make life easier for all concerned - IRA owners, qualified plan participants, their beneficiaries and anybody in the industry of servicing these retirement accounts.

Normally only tax lawyers and CPAs would get excited about changes to our tax system, but this change to the required minimum distribution rules has an immediate and positive effect on virtually every individual older than 70 and a half- a reduction in his/ her distribution required for the year. For many, this also includes an accompanying reduction in income taxes.

Smaller required distributions are a result of a new uniform table that calculates a distribution amount assuming a joint life expectancy period with a beneficiary 10 years younger than an account holder.

The IRS is allowing us to apply these new proposed regulations immediately. Is this difficult? Is this risky? The key word is "proposed." Until proposed regulations become final it is not always wise to rely on what they say as the final regulations could incorporate changes that could make a "good" decision a "bad" decision. The IRS, however, has stated that if any further guidance is more restrictive it will not be applied retroactively. As an individual taxpayer/IRA owner, that statement may give you comfort but as a provider of IRAs and/ or qualified plans are you ready to put your products and services on the line? Following is a list of major areas to consider as you answer that question.

Education: Customer service representatives and operations staff will need to know how the new regulations change their daily activities and their relationships with your customers.

Support Systems: The information and operation systems behind your IRA/qualified plan products and services will need to be updated before 2002. This needed update may or may not be affected by the IRS' release of final regulations.

Affected Customers: Eventually, all IRA owners and qualified plan participants will be affected but only those who are older than 70 and a half and some beneficiaries are affected immediately. What level of service do they expect of you? How eager are they to take advantage of the new rules in 2001?

Final Regulations: Final regulations to be released by the IRS before the end of 2001 could have an effect on your policies or processes regarding RMDs. There are many unanswered questions and confusing parts of the new proposed regulations that need clarification. Until these are addressed by the IRS and the answers or solutions become a part of the final regulations (or other guidance) you cannot finalize your policies and processes. This puts you in the somewhat precarious position of having to provide updated products and services before the official rules are complete.

Is it Ever Really "Final?" It appears that even the final regulations will not tell us everything we need to know to administer RMDs. By now you have read about the exciting retirement plan changes that were part of the tax bill recently signed by President Bush. What you may not have read about was a one-paragraph provision hidden in the 180-plus pages that will change the "life expectancy" tables used to calculate RMDs. At this time, it is not clear when that will happen (presumably this year) and how it will affect RMD amounts. There is reason to believe that because we are generally living longer, revised life expectancy tables will reflect longer life expectancy factors which, under the RMD calculation, would result in smaller RMD amounts.

By Greg Tacik

Greg Tacik is a senior retirement plan consultant for Bankers Systems, St. Cloud, Minn.