New IRA rules benefit retirees

Posted: Thursday, March 22, 2001

DENVER (AP) -- The Internal Revenue Service has significantly simplified the rules that require retirees to start taking money out of their traditional IRAs and qualified retirement plans.

''The minimum required distributions rules were complex and were traps for the unwary. It was very difficult to get it right,'' says Lisa Start-Khalilian, a tax expert at the College for Financial Planning. ''Now the rules are relatively simple.''

Some of the old distribution rules still apply, she says. For example, you still must begin taking out minimum required distributions from your IRA and qualified plan retirement accounts such as tax-deferred 401(k) plans no later than April 1 of the year following the year you turn 70 1/2. The exception is that generally you don't have to take out distributions from a qualified plan if you're still working for that employer.

The main changes under the new rules, Start-Khalilian says, affect how much you must take out and the naming of beneficiaries.

First, ''You're no longer doomed by the beneficiary you pick,'' she says.

''Under prior law, your minimum required distributions were dictated in part by the beneficiary you named when you started taking required distributions or upon your death,'' she says. ''Now, with some exceptions it does not matter whether you name anyone as a beneficiary once you start taking required distributions.''

Start-Khalilian emphasizes that it is usually better to name a beneficiary than to ignore it, in the event you die earlier than expected. But even if you name someone, you can always change the name later on, without altering the amount of your minimum required distributions. ''It gives you more planning opportunities than before,'' she says.

Another feature of the new rules is that ''IRA owners no longer are required to choose among several methods for determining their minimum required distribution,'' Start-Khalilian says. ''No more having to choose among fixed term, joint recalculation, or the split method.''

Most IRA owners will use a uniform table that assumes a joint life expectancy recalculated annually for a designated beneficiary 10 years younger than the owner. You can use this table regardless of whether you've named a beneficiary or your beneficiary, such as your spouse, is around your age or even older.

''For most people, this method of calculation generally results in smaller minimum required distributions than under the old rules,'' says Start-Khalilian. ''That will benefit those retirees who don't need or want to withdraw larger sums of money from their plans. This allows IRA owners to minimize their taxes and stretch out the life of their IRA. No matter how long you live, the account never goes to zero.''

Of course, you can always take out more than the minimum amount should you want or need the money.

The major exception to the new uniform table is for couples in which one spouse is more than 10 years younger than the other. Then you can calculate joint life expectancy on the actual ages, instead of the artificial table, resulting in yet smaller required distributions.

The new rules will help the beneficiaries of the IRAs, as well. Following the death of the IRA owner, the calculation for the minimum required distributions of what is left in the retirement account usually will be based on the life expectancy of the person who actually inherits the IRA. Before, it depended on who was the beneficiary at the time the IRA owner started required distributions, or if death came earlier than distributions began.

Furthermore, although beneficiaries cannot be added after the IRA owner dies, some beneficiaries can be excluded through various strategies up until Dec. 31 of the year following the death of the IRA owner. This allows for post-mortem planning that can help the beneficiary who ultimately takes control of the inherited IRA.

Although these new rules technically are only proposed by the IRS at this point, IRA owners can apply them immediately for distributions they take out for the tax year 2001, Start-Khalilian says. Retirees taking distributions from qualified retirement plans, such as the 401(k), will have to wait a little longer since they cannot apply the new rules until employers revise their plans to conform to the new regulations. That could be as late as Jan. 1, 2002, when the new rules are expected to be finalized. The new rules do not apply to Roth IRAs because you are not required to make minimum distributions from a Roth.

Start-Khalilian says that until the rules are finalized, IRA owners and their beneficiaries can use either the old or new rules, though most would want to follow the new rules. She recommends seeking professional advice on how best to take advantage of them.

End advance for Thursday, March 22

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