Back in 2002, the IRS made sweeping changes to the calculation of
Required Minimum Distributions (RMDs) from IRAs. These regulations
substantially simplified the existing 1987 rules, require less to
be withdrawn, and allow more flexibility in (and importance of) naming
beneficiaries.
The Stretch IRA.
IRAs were created to allow for tax-deferred retirement savings. Dividends
and capital gains are not taxed until withdrawn, when the full withdrawal
is taxed as ordinary income. Therefore, if other income sources or
non-IRA investment assets are sufficient, withdrawals are usually
postponed as long as possible. At age 70 ½, the IRS requires you to
begin taking withdrawals in an amount designed to pay out the balance
over the account owner’s remaining life expectancy.
Therefore, planners have long recommended steps that are designed
to minimize the amount required to be withdrawn, and to allow heirs
to withdraw the assets over their life expectancies as well. Despite
these techniques, many retirees have found themselves forced to withdraw
larger amounts than they needed for cash flow.
The First Step of Tax Relief!
While withdrawals are still required to begin at 70 ½, the amount
that must be withdrawn is much less for most people, and the
calculation simpler ! For those who remember the decisions
required under the old rules, who was named as beneficiary determined
what life expectancy was used. Now there is one table to use regardless
of beneficiaries and it gives much higher life expectancies. Technically,
this new table treats everyone as if they recalculate their life expectancy
every year, using joint life expectancy with a non-spouse beneficiary
more than 10 years younger than them. Whew! Bottom line: a smaller
RMD for almost everyone (unless they want to withdraw more!).
If your spouse is more than 10 years younger than you, using joint
life expectancy still gives a lower RMD amount, and you can continue
to use the old calculation.
So What’s The Catch?
In turn for allowing smaller distributions, the standardization
of the calculation now allows the IRS to better monitor compliance
with these rules. The custodian who holds your IRA account now has
to report annually that you should make a withdrawal from
your account as your RMD , and even offer to calculate the amount
for you. The IRS now plans to start checking to see if you withdrew
enough and begin to charge the penalties if you didn’t!
Therefore, accurate calculations are more important than ever. Also,
these new rules may change the way you want to structure your IRAs,
such as changing beneficiaries, and they increase the importance of
naming contingent beneficiaries. If you need assistance in reviewing
your IRAs, give us a call.
