Wondering how much to withdraw each year from your individual retirement account (IRA) once you reach that "magic" age of 70-1/2? Thanks to a recent change in government regulations, your decision-making just got a lot simpler, for both you and your beneficiaries. These new rules are in effect as of January 2001. Even though they are called "proposed regulations," so was the previous set of rules, which was in effect since 1987.
The U.S. Treasury department has announced that, although the rules do not officially take effect until 2002, they can be used for calculating minimum required distributions this year. However, they cannot be used by people who turned 70 ½ in 2000 and decided to postpone their distribution until April 1, 2001. Those folks must still follow the previous set of withdrawal rules.
The changes in minimum distribution rules are expected to save taxpayers billions of dollars over time. Most people will see a reduction in the amount that they are required to withdraw from their IRA, which will both reduce their income taxes and lengthen the life of their IRA accounts. There will also be potentially larger distributions for beneficiaries, thus creating new estate planning opportunities.
One of the biggest changes is the creation of a uniform life expectancy table instead of the confusing "crazy quilt" of calculation methods such as term certain and recalculation. The new table is based on a joint life expectancy with a ten-year age difference. In other words, regardless of who is named as an IRA beneficiary, they will be treated as if they are ten years younger to determine minimum required IRA payouts. There is one exception, however. If a spouse is more than ten years younger than an IRA owner, a couple can use their actual joint life expectancy. For those couples, the required payout will be even smaller than that which is allowed under the uniform table.
Calculating your required distribution will no longer require a degree in math or accounting. Now, all you have to do is add up the total amount in all of your IRA accounts on December 31 of the previous year and divide the amount in your IRAs by the appropriate figure in the new Proposed IRA Uniform Distribution Table. The new table is available at many financial institutions that serve as IRA custodians (e.g., brokerage firms) and online at the Kiplinger's Personal Finance Web site at www.kiplinger.com and the Rutgers Cooperative Extension Web site at www.rce.rutgers.edu/money2000/ira-table.html .
For example, the divisor for someone who turns 70 in the first half of 2001 is 26.2. If that person has $100,000 in an IRA, they would divide $100,000 by 26.2 to determine the required minimum withdrawal amount ($3,817). Actual cash withdrawals can be taken from any number of accounts that you hold as long as the total of all withdrawals meets the minimum required amount. Of course, you can always withdraw more than the minimum required distribution any time that you choose, without penalty, once you reach age 59-1/2. However, if you withdraw less than you are required to after age 70-1/2, the IRS assesses a harsh penalty equal to half of what you should have withdrawn, but didn't.
Another change in IRA distribution regulations is that beneficiary designations at age 70-1/2 are no longer irrevocable. Beneficiaries can be changed freely because they do not affect the calculation method (unless a spouse more than ten years younger is selected).
Below is some advice to get your estate in order and make the most of these new regulations:
Take advantage of new estate planning opportunities as well as tax savings. Under the new rules, IRA distributions can be stretched out over children's life expectancies.
Review all IRA beneficiary designations and add contingent beneficiaries, if needed, to add flexibility to estate plans.
Consider consolidating multiple IRA accounts as you get ready to take distributions to simplify the process of determining the correct withdrawal amount.
Do it right. Under the previous withdrawal calculation system, even the IRS couldn't tell if people were taking the right amount of IRA withdrawal. Now, with a simplified set of rules and a uniform distribution table, the math is as easy for the IRS as it is for taxpayers. In addition, the new rules require IRA custodians (e.g., banks, mutual fund companies) to report to taxpayers and the IRS the required distribution that is supposed to be withdrawn so as to ensure compliance.