Surprise! The IRS Makes Life Easier for Retirees


Turning 70 1/2 years old just got easier, at least when it comes to retirement savings. Under a proposed government rule change, it also will be simpler to plan financially for your retirement years. In a widely applauded move, the IRS is simplifying its rules for withdrawing funds from individual retirement accounts (IRAs), 401(k)s, and most other tax-advantaged retirement-savings plans. The proposed changes also decrease the minimum amount that must be taken out at age 70 1/2, for the first time giving people the option of leaving money in their IRAs and 401(k)s to appreciate if they choose.

The proposed regulations will streamline the complicated procedures required to calculate the minimum sums that must be withdrawn from retirement accounts when people reach age 70 1/2. The changes would provide one standardized way for people to determine minimum distributions, which are based on life expectancy. "The old rules were so confusing that they created havoc," says Eric Donner, president of Retirement Distribution Strategies Inc. in Summit, N.J., which teaches financial planners and accountants about retirement-distribution rules. "It's almost hard to make a mistake now," adds Ed Slott, a tax accountant in Rockville Centre, N.Y., and publisher of Ed Slott's IRA Advisor, a monthly newsletter.

LOWER TAX BILL. The proposed changes won't become final until January 1, 2002, after public hearings. But IRS attorney Marjorie Hoffman says taxpayers can rely on the provisions to determine minimum distributions during the 2001 calendar year. Hoffman says the proposals apply to traditional IRAs and defined-contribution retirement-savings plans. One exception: the Roth IRA, which has no mandatory-withdrawal requirements.

Perhaps the biggest plus of the proposed rule changes is that they'll result in smaller required minimum distributions for most people. While IRA holders won't get as much money up front as they once did, they can let the funds in their accounts continue to appreciate. They'll also face a smaller income tax bill at age 70 1/2 if they choose to take a smaller distribution.

The proposed changes also give people more flexibility in selecting beneficiaries. The provisions don't alter the age at which people must begin to withdraw from a tax-advantaged retirement-savings account -- Apr. 1 of the year after you turn 70 1/2 years old. What the proposed rules do change is the way life expectancy is calculated.

SMALLER MINIMUMS. Under the old regulations, people who reached age 70 1/2 years old had to pick a beneficiary, usually a spouse. Required minimum withdrawals were then based on their joint life expectancy. That number of years was divided into the retirement-account sum to determine the minimum yearly distribution. But now, says the IRS's Hoffman, joint life expectancy will be based on the life expectancy of the person who owns the IRA, plus that of a beneficiary who is automatically assumed to be 10 years younger.

For most people, this will result in a longer joint life expectancy and thus smaller minimum required distributions from the account. People who take less money out of their IRAs pay less in income taxes, leaving more money to build up in the account for heirs.

Of course, there's one exception. If your spouse is your beneficiary and is more than a decade younger than you, you would continue to use a joint life expectancy based on your spouse's actual age.

CHILDREN BENEFIT. Another important change, according to Hoffman, is that a person can name an additional beneficiary to the account, to take effect after the account holder's death. Previously, the beneficiary picked when you were 70 1/2 couldn't be changed for purposes of calculating minimum distributions. But now account holders can make it possible for their children or others to take minimum distributions from the account over their lifetime. In most cases, that extends the amount of time the funds will be appreciating, increasing the amount of money owed to the beneficiaries.

People age 70 1/2 or older can figure out their new minimum distributions for 2001 by going to the IRS Web site (www.irs.gov). There you can retrieve IRS Publication 590, entitled Individual Retirement Arrangements. The pertinent information will be in Appendix E (Life Expectancy and Applicable Divisor Tables). Much of the time, IRS rule changes don't benefit taxpayers. But these provisions should make life easier for retirees. By Susan Scherreik in New York


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