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New Distribution Rules For Retirement Accounts

The IRS doesn't often do you a big favor. But this year it did just that when it revised the rules for taking minimum distributions from individual retirement accounts (IRAs), 401(k) plans and other qualified retirement accounts. In most cases, the new rules allow you to stretch distributions over a longer period, generating more tax-deferred income.

The new rules are simpler and more generous to account owners and their beneficiaries. You can now change beneficiaries at any time -- and you don't even have to name one during your lifetime. The IRS greatly simplified calculating your required minimum distribution (RMD) each year. This lets you more easily predict future earnings for tax and estate planning.

As usual, the IRS wrote the new rules in an obscure technical language similar to English, but hard to translate. So here's an easily understood summary of the new rules.

Calculating Your Minimum Distribution

The IRS didn't change the date on which you must start withdrawing -- and paying tax on -- the money from your tax-deferred account. The date remains April 1 of the year after you reach age 701/2. Neither did the IRS change the 50% penalty for failing to take the minimum distribution, which the IRS promises to more strictly enforce.

But the IRS did revise how you calculate your RMD. In most cases, you'll have to withdraw less than under the old calculation methods. And you can stretch out the distribution period longer, allowing more tax-deferred interest, dividends and capital gains to accumulate in your account.

The new rules apply to both those who have already begun taking distributions and to those who haven't.

Life Expectancy And Your Beneficiary

Beginning no later than April 1 of the year after you reach 701/2, and every year thereafter, you must take distributions from your traditional IRA, Roth IRA, 401(k) or other qualified retirement plan. Under the old rules, you had to calculate the RMD using both your age and your beneficiary's age. Then you had to choose from three calculation methods: term certain, joint recalculation or a combination of these.

The new rules let you simply use the IRS Uniform Life Expectancy Table (see page 5). In most cases, you'll have to withdraw less annually than under the old calculation methods, because you most likely will use a longer life expectancy. But what if your spouse is your beneficiary and is more than 10 years younger than you? Then you'll base your calculation on your joint life expectancies and use a different IRS table (listed in IRS Publication 590). You can call us for a copy.

Because your calculations don't depend on your nonspousal beneficiary's age, you may change beneficiaries at will without affecting your RMD. In fact, you needn't name a beneficiary at all. If you die without naming one, your heirs will inherit the IRA. Under the old rules, failing to name a beneficiary at age 701/2 would probably have required your heirs to take bigger distributions over a shorter period, increasing the tax bite.

Postdeath Distributions

After you die, your beneficiary must begin taking distributions immediately. But the distribution period will be based on his or her life expectancy.

Suppose you die without naming a beneficiary, and you've already begun taking distributions. Then your heirs will use your age at the end of the year following your death to calculate their distribution period with the Uniform Life Expectancy Table.

If you die without naming a beneficiary and before you start distributions, your heirs will have a minimum of five years to withdraw the money. This eliminates the horrendous tax consequences of lump-sum distributions.

Effective Dates

You must follow the new rules starting with 2002 distributions. But you may choose to use them now. For more information, please call us.

If you die without naming a beneficiary and before you start distributions, your heirs will have a minimum of five years to withdraw the money.

Uniform Life Expectancy Table

To calculate your required minimum distribution, divide your retirement account balance on Dec. 31 of the previous year by your distribution period. But don't use this table if your beneficiary is your spouse who is more than 10 year younger than you. Instead, use the table in IRS Publication 590.