O'Flaherty, Heim, & Curtis Ltd.

IRA Rules Simplified

By: Gerard O’Flaherty

By law, you must withdraw a minimum amount from your tax-deferred retirement savings every year once you reach age 70 ½. The requirement is intended to ensure that retirees eventually pay taxes on their tax-deferred retirement savings. But the old rules for calculating minimum distribution were complex and full of trap doors. Choosing the wrong beneficiary or calculation method could result in higher-than-expected mandatory withdrawals and big tax bills for your heirs. Worse, many decisions were irrevocable. The new rules scrap the old formulas in favor of a uniform method that will reduce required annual minimums for most retirees. Among the advantages:

1. A uniform lifetime distribution period, based upon the Minimum Distribution Incidental Benefit (“MDIB”) divisor table, is used for almost all participants, regardless of whom the participant names as his or her beneficiary. The one exception to this much-simplified rule is where the participant names a spouse more than 10 years younger than the participant as sole beneficiary of the participant’s IRA or retirement plan. Under these circumstances, lifetime distributions are based upon a joint and last survivor life expectancy.

2. Probably the most significant change made by the new Proposed Regulations relates to determining a designated beneficiary. Under the old rules, a designated beneficiary had to be determined by the participant’s Required Beginning Date (“RBD”).

Under the new Proposed Regs., a beneficiary can be determined as late as December 31st of the year following the year of the participant’s death. This dramatic change allows the participant to change his or her beneficiary at any time without it resulting in an increase in his or her minimum required distribution (“MRD”).

3. Your beneficiaries can reduce their tax bills by stretching out inherited IRAs. Previously, children who inherited an IRA from their parents faced myriad withdrawal scenarios, most of them bad. In some cases, they were required to withdraw the money in five years. In others, they had to withdraw it all at once and pay taxes on the entire amount. Now, your heirs can take withdrawals based on their life expectancies.

4. But the simplified rules don’t eliminate the need for estate planning. They don’t, for example, shield inherited IRAs from federal estate taxes. If your estate’s value, including your IRAs, exceeds the estate-tax exemption — $675,000 in 2001 — you need to talk to an estate planner about strategies to reduce your tax hit.

And don’t let the new rules lull you into forgetting to name a beneficiary for your retirement plans. Without a beneficiary, your IRA becomes part of your estate when you die. If that happens, your heirs may not be able to stretch out the IRA over their lifetimes, resulting in larger distributions and bigger tax bills.

For assistance with you estate planning needs, contact a member of O’ Flaherty, Heim, Egan & Birnbaum LTD’s estate and trust department.

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