April 2001 On-line Tax Planning

New Retirement Account
Distribution Rules

The IRS has simplified the method for determining required minimum distributions (RMDs) from 401(k) plans, individual retirement accounts (IRAs), and most other tax-favored retirement plans.  Whether you are an account owner or a beneficiary, the changes will make figuring out your RMD much easier and may even reduce the amount that you must withdraw each year.

The new method is scheduled to be effective in 2002.  However, you may opt to use it for your 2001 IRA distributions.  For your qualified retirement plan accounts, however, you can take advantage of the new rules in 2001 only if your plan sponsor adopts a model plan amendment allowing the new treatment.

Explanation
Under the old rules, you generally locked in your minimum distributions by selecting a beneficiary and a calculation method by your "required beginning date" (generally, April 1 of the year after you turned age 701/2).  Your required beginning date remains the same under the new rules, but each year's minimum distribution amount is calculated using an age-based factor from the "Uniform Table of Required Minimum Distributions" chart.

The Roth IRA rules do not require minimum distributions until after the original Roth IRA owner dies.  However, Roth IRA beneficiaries must follow the same minimum distribution rules that apply to traditional IRAs.

If your spouse is more than 10 years younger than you are and is your sole beneficiary, you are exempt from using the uniform table.  In this case, your distributions may be based on your joint life expectancy, allowing you to stretch out distributions over a longer term.

Your RMD for a particular year is determined by dividing your account balance at the end of the previous year by the age-based distribution period found in the uniform table.

Example:  In 2001, Bob reaches age 74 and his wife Mary turns age 71.  Bob's IRA account balance at the end of 2000 was $600,000.  According to the uniform table, Bob's distribution period is 22.7 years.  Under the new rules, Bob's 2001 RMD would be $26,432, which is $600,000 divided by 22.7.

Inherited Accounts
The new rules also simplify distributions from inherited retirement accounts.  If you have designated a beneficiary for your account, your beneficiary's minimum distributions will be based on his or her life expectancy.  Your beneficiary designation generally becomes final on December 31 of the year following the year that you die.

Different rules apply if you have not designated a beneficiary for your account.  If that's your situation, your account balance will be distributed over your remaining life expectancy according to the uniform table (assuming that you die after the required beginning date).  If you die before your required beginning date, your account generally must be liquidated within five years.

The Stretch IRA
While many people start taking retirement distributions long before they reach age 70 1/2, you may want to keep your money in the plan for as long as you can.  Over 60 years, a $200,000 IRA can distribute more than $4.9 million, with an average 8% rate of return, compounded monthly.  Stretching out IRA distributions can do that, thanks to compounding and tax deferral.  The stretch IRA works by naming a significantly younger person as your beneficiary.

Example:  George names his son Sam as a beneficiary of his IRA.  At age 70 1/2, George decides to take minimum distributions according to the uniform table.  When George dies, Sam gets the IRA and can spread out the withdrawals over his remaining life expectancy.  He pays income taxes only on his annual required distributions.  And Sam can also name his daughter Donna as his own beneficiary under his will to allow any residual amounts to pass to a third generation.

We hope that you can take advantage of some of these developments and their possible effect on a stretch IRA strategy.  Call us to discuss these or other opportunities in more detail.

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For More Information Contact:

Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN  46904-2147

Telephone: (765) 236-2300
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Internet: info@bmmcpas.com