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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

New Rules Simplify IRA Calculations and Planning

Owners of Individual Retirement Accounts (IRAs) and other qualified retirement plans have reason to rejoice. According to the New Jersey Society of Certified Public Accountants (NJSCPA), the Treasury Department has issued new rules streamlining the formula used to determine the required minimum annual distribution from a tax-deferred retirement fund upon reaching 70½ years of age. Previous rules, which required plan owners to choose a beneficiary and offered limited choices for determining life expectancy, were extremely complicated and, for the most part, irrevocable. In fact, the wrong decision could mean outliving your retirement funds.

The new rules provide a simple and uniform method of calculating life expectancy that, in effect, lengthens for tax and distribution purposes the plan owner's life expectancy. As a result of the change in calculating minimum withdrawals, retirees can take smaller annual distributions. A lower annual withdrawal means a lower tax bill and more money left in the plan to accumulate tax-deferred earnings.

While the new rules officially become effective in 2002, qualified individuals, by using the new calculation method, can take out less money from their IRAs in 2001. Bear in mind that these rules only set the minimum amount you must withdraw annually; you can always take more if your circumstances require you to do so - and you're prepared to pay the tax bill. December 31 of each year remains the mandatory deadline for annual distributions.

CALCULATING THE ANNUAL REQUIRED WITHDRAWAL
Now, with one exception, the amount of your annual minimum withdrawal is based on your IRA account balance at the end of the previous year and the joint life expectancy for you and your beneficiary (even if you haven't named one) as shown in the IRS Uniform Life Expectancy Table. This table assumes you have a beneficiary who is 10 years younger than you.

The table provides a life expectancy divisor corresponding to your age. A 73 year-old retiree, for example, would add up the amounts in all his or her retirement accounts and divide the total by 23.5, the divisor for age 73, to determine the minimum withdrawal requirement for the year. A $400,000 IRA would require a minimum distribution of $17,021 ($400,000 divided by 23.5).

The lone exception to the new calculation rules applies to IRA owners whose sole beneficiary is a spouse who is younger by more than 10 years. In such cases, the IRA owner retains the option of calculating the minimum required distribution using the joint life expectancy figures based on the actual ages of the plan owner and his or her spouse. This will result in an even lower required withdrawal than would the new method.

CHANGES AFFECT BENEFICIARIES TOO
Prospective retirees no longer have to lock in a beneficiary at an early date. You can name - and change - beneficiaries as often as you like throughout your lifetime. In fact, you are no longer required to name a beneficiary. And because the beneficiary's age no longer affects the size of the minimum annual distribution, plan owners have more flexibility in naming beneficiaries.

Retirement plan owners are not the only ones to benefit from the new rules. A beneficiary who inherits an IRA also will benefit by being allowed to spread remaining distributions over his or her own lifetime. Previously, children who inherited an IRA from their parents were required to withdraw the money within five years, or in some cases, all at once, resulting in a substantial tax bill.

Although not required, it is generally a good idea to name a beneficiary. Without a beneficiary, your IRA becomes part of your estate when you die.

THE IRS BENEFITS AS WELL
CPAs caution IRA holders that the proposed rules include a new tax-reporting system requiring IRA custodians and trustees to send year-end account balance and minimum required distribution information to the IRS. This makes it easier for the IRS to track down taxpayers who are not taking at least the minimum required distribution. As was previously the case, if you fail to make a withdrawal or take out less than the required distribution, the IRS tacks a 50 percent excise tax on the shortfall.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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