The Minimum Distribution Rules and Their Critical Role in Controlling the Floodgates of Qualified Plan Wealth
BYU Law Review, Vol. 2000, No. 2, P. 587
39 Pages Posted: 20 Oct 2000 Last revised: 2 Aug 2014
This article discusses the complexity associated with the minimum distribution rules under Internal Revenue Code section 401(a)(9) and why Congress must reform these rules.
Over the past two decades the landscape regarding qualified plans has changed dramatically: Defined contribution plans have replaced defined benefit plans as the plan of choice, there are fewer limitations on the size of retirement account balances, and Congress has introduced Roth IRAs. These changes, along with others (e.g., higher marginal tax rates than in the 1980s), have catapulted the minimum distribution rules to a new level of importance.
The stated goal of the minimum distribution rules is to ensure that taxpayers use their qualified plan benefits during their (and their spouses') retirements. This analysis, however, concludes that the minimum distribution rules fall far short of realizing this goal. Instead, they often permit the tax subsidy to continue on for several generations, allowing the accumulation of enormous tax-sheltered accounts. In addition, the minimum distribution rules are virtually impossible to administer and favor high-income taxpayers.
This analysis makes two alternative proposals. The preferred proposal would have Congress modify the minimum distribution rules to permit only a surviving spouse to be a designated beneficiary, mandate that life expectancies be recalculated for purposes of computing distribution amounts, and direct that plan administrators, especially IRA administrators, be held responsible for making required distributions. The alternative proposal would be to eliminate the minimum distribution rules entirely and replace them with mandatory distribution requirement after the deaths of the taxpayer and the taxpayer's spouse.
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