IRS Dramatically Simplifies Minimum Distribution Rules

By: The Financial Planning Association
If you have already begun taking out required distributions from an individual retirement account or qualified retirement plan, expect to soon, or have recently inherited an IRA or retirement account, listen up. In a surprise to everyone, including retirement experts, the Internal Revenue Service has dramatically simplified the minimum distributions rules for account owners reaching age 70 1/2. You may want to act as soon as possible to take advantage of these rules, which become mandatory January 1, 2002.
The new rules sweep away nearly all of the complexity and confusion of the previous rules. Moreover, IRA owners can immediately apply these new rules to distributions they take for the tax year 2001. (They do not apply for distributions that count for the tax year 2000 but not actually taken out until 2001.) Participants in retirement plans such as 401(k) plans will have to wait until their employer revises plan documents to reflect the new rules, which must be done later than January 1, 2002.
The new rules simply two major areas: how required minimum distributions are calculated and the naming of beneficiaries.
As you may know, you must start taking lifetime required minimum distributions from your IRAs, and any employer’s qualified retirement accounts if you no longer work for that employer, no later than April 1 following the year you turn 70 1/2. The amount of the minimum withdrawals depended on the calculation of your life expectancy beginning at 70 1/2. The 70 1/2 rule still applies. You still have to start taking money out at that point. However, how you determine life expectancy, and thus the size of those annual required withdrawals, has been greatly simplified.
Before the changes, you had a multitude of choices, depending on whether you designated your spouse or someone else to be the beneficiary, and whether you chose a fixed-term, joint recalculation or hybrid method of determining life expectancy. These choices often presented numerous drawbacks. Now you don’t have to worry about making the “wrong” choice. Nearly everyone will use a uniform table. This table is a form of joint life expectancy recalculated annually, based on the life expectancy of the owner and a beneficiary ten years younger. However, you can use this table even if you don’t have a designated beneficiary or one who’s less than ten years younger. This results in smaller required minimum withdrawals compared with most of the older methods. Smaller required withdrawals leave more in the accounts to grow tax deferred. Of course, you can always take out more than the minimum if you want or need to.
For example, a 71-year-old using the Uniform Table would divide the total amount in their retirement accounts by a “divisor” of 25.3. If the accounts total $500,000 at the end of the prior year, they must take out by the end of that year at least $19,763. Under the old rules, if their spouse were also 71, their required minimum distribution would have been $25,252 a 22 percent larger required payout.
IRA or retirement account owners who name a spouse who is more than ten years younger can base their withdrawals on their actual joint life expectancies, not the uniform table. The result is yet smaller required withdrawals. However, this applies only to spouses, not other beneficiaries such as children.
The other major change involves the choice of beneficiaries. Under the old rules, the beneficiary in place at the time that required withdrawals started affected permanently the calculation of the minimum distributions. You could change beneficiaries, but you couldn’t alter the calculation. Now you can change your beneficiary any time you want to up to the point of your death and potentially alter the payout calculation.
Furthermore, although new beneficiaries can’t be named after death, your designated beneficiaries may be able to make some changes up to December 31 of the year following your death. For example, a beneficiary might disclaim his or her inheritance for the benefit of a younger contingent beneficiary. Better yet for heirs, the life expectancy of the inherited retirement account will be based on the beneficiary who actually inherits the account, not, as previously, who was named at date of death or age 70 1/2.
These dramatic changes provide opportunities to revise your retirement distributions, so you should consult your Certified Financial Planner professional to review these changes to be sure you are taking full advantage of them.
This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by a local member in good standing of the FPA.

By | 2018-11-29T16:46:40+00:00 September 20th, 2012|Blog|

About the Author: