The IRS has recently issued new regulations to simplify the method for taking distributions from your qualified pension, profit sharing, IRA and 401(k) plans.  The new rules are applicable to calendar year 2002 required distributions.  Additionally taxpayers can elect to apply the new rules for 2001 required distributions.  These new rules will apply to both individuals already taking distributions from their plans and for those individuals yet to turn 70 1/2 - the key date for distributions to begin. 

For most people, the IRS has provided one table that estimates the life expectancy of individuals aged 70 and above.  Simply put, the individual must take all of their combined pension, profit sharing, IRA and 401(k) balances and divide by that number.  The result will be the required distribution amount for that year.  For example, a 71 year old with an IRA balance of $253,000 would divide by 25.3 (from the table) and compute a distribution of $10,000.  A 72 year old would use a new factor of 24.4 and so on.  These new rules may allow many retirees to reduce the amount of their required distributions and the resulting tax liabilities.  Reducing required distributions could also help individuals to preserve wealth for future generations.

Individuals would no longer have to be concerned about the age of the beneficiary - spouse or other relative - when making the calculation.  The only exception would be if a spouse were more than 10 years younger than the owner of the IRA.  Although regulations currently require an account owner to designate a beneficiary by his required beginning date or death in order to retain all distribution options, the new proposed regulations would fix the time for determining the identity of the designated beneficiary at the end of the year following the account owner's death.  This permits a taxpayer to change beneficiaries without affecting his or her minimum required distribution and permits post-death changes in beneficiaries. 

Many other rules have been clarified related to what happens when the IRA owner dies and the beneficiary begins to receive the distributions.  Generally, these regulations are easier to understand and apply for the beneficiary or beneficiaries.  In the event an account owner dies before reaching the required beginning date, the current default rule requires payment of all benefits to a non-spouse beneficiary within five years.  The new proposed regulations would provide instead for distribution over the life expectancy of the beneficiary in all cases where there is a designated beneficiary. 

Once an individual reaches 70 1/2, decisions need to be made.  Not only must they calculate the required distribution amount, but they must also determine which investments to sell, when to take the distribution and how to report them on their tax return.  We recommend that individuals seek professional guidance in this area when decisions need to be made.  Since individuals face these decisions only once in their life, it pays to seek some advice in this area.  Being fully informed provides peace of mind. 

We would be pleased to assist you with questions on these new rules.  Call or reply to Mark Blood, Dennis Stein or Tim Thaney if you would like our assistance.