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New Minimum Distribution Rules

July 2001

To Our Clients and Friends:

The IRS recently released a new set of regulations that greatly simplify and generally improve the tax rules that apply to IRA beneficiaries and that require IRA owners to begin taking minimum distributions from their IRAs (other than Roth IRAs) by April 1 of the year after they reach age 70½. The new rules aren’t proposed to be effective until next year, but taxpayers are free to follow them now. Although you may have seen something about them in the news, we wanted to make sure you’re aware of the key provisions of the new rules.

What Has Changed?

The new guidance simplifies the IRA distribution rules in several ways. For example:

• To determine required distributions during your lifetime (once you reach age 70½), you no longer need to choose a permanent beneficiary of your IRAs or decide whether to recalculate your life expectancy each year. Instead, based on your age, you merely look up a factor in an IRS-supplied table and divide this into the balance of your IRAs at the end of the prior year. (A special rule can apply in the year a person turns age 70½.)
  
  
• Because the new rules assume everyone has a beneficiary that is 10 years their junior, most IRA owners who are already taking distributions will see a decrease in the amount they’re required to take out each year.
  
  

  Example: Ruth, who turns 74 this year, has been taking IRA distributions based on her single life expectancy, recalculated each year. Assuming the balance of her IRAs at the end of 2000 was $300,000, she is required to take a distribution of $22,728 in 2001 under the old rules. However, under the new rules that can be used this year, her required distribution drops to $13,216. (Remember, these are the minimum requirements. She is always free to take a larger amount if she wants to.)

• Required distributions to beneficiaries of an IRA owner who dies before age 70½ will normally be over the life expectancy of the oldest beneficiary instead of over a five-year period that frequently applied before. (As under the old rules, when the surviving spouse is the beneficiary, more favorable rules apply.)

Conclusion

The new rules provide a second chance to many IRA owners who perhaps haven’t made the best choices in the past concerning how they wanted their IRAs distributed. And, for nearly everyone else, they make it easier to stretch out the tax benefits of IRAs over a long period of time. Call us if you’d like more information about how the new rules apply in your particular situation.

Best regards,

Nishball, Carp, Niedermeier, Pacowta & Co.