April 2001 Bulletin

IRS simplifies IRA planning

New rule changes how retirees decide minimum distributions

By Joel M. Blau

Unbelievable as it may seem, the Internal Revenue Service has actually stepped up to the plate and simplified one of the most complex areas of retirement planning.

Usually when the IRS utters words like "reform" or "simplify," you end up sporting just the opposite opinion once you witness the impact on your own tax return. But a new rule, effective this year, actually accomplishes what it is intended to, and it impacts almost all physicians and their families’ financial future.

For most physicians, qualified retirement plans and IRAs make up a large percentage of their net worth. Many retirees rely on these accounts to supply the necessary funds for their retirement standard of living as they tap into assets penalty-free after age 59 1/2. Others prefer to rely on other types of investment or earned income to meet their retirement needs so their retirement accounts continue to grow on a tax deferred basis. Unfortunately, the IRS requires that retirees receive distributions from their accounts beginning at age 70 1/2. That part has not changed.

What has changed, however, is the often complicated and cloudy process by which retirees decide how their required minimum distribution will be calculated. If you are already taking distributions, or have strategized ahead of time, you are familiar with terms such as "recalculations," "term certain" and other hybrid options and beneficiary naming choices. These terms were used to match individual income needs with applicable income and estate tax laws to minimize taxation. The new regulations essentially make these complicated choices history.

Required minimum distributions will now actually be lower, as the new tables automatically assume a joint life expectancy with the spouse being 10 years younger than the participant, even if they aren’t. If the age spread is greater than 10 years, you benefit from another table that would lower the mandatory distributions based on the actual joint life expectancy. It’s really as simple as looking at your December 31 balance and dividing it by the figure from the new life expectancy tables.

In addition, the IRS is providing greater post death planning opportunities for executors by allowing the naming of a beneficiary and contingent beneficiary up to the end of the year following the year of death. This is in contrast to the old rules that made a beneficiary designation irrevocable at the time of death. Non-spouse beneficiaries, who previously needed to receive a payout over five years, can now receive distributions over their lifetime.

So why would the IRS take such a monumental step to lower required minimum distributions thus decreasing the amount of taxes owed? Many feel that with all of the complex choices available, the IRS was simply unable to audit the activity. Now the IRS will require the plan’s custodian, such as a brokerage firm or bank, to report the minimum distribution, which the IRS can then check against the taxpayer return.

While final regulations are not expected to be implemented until Jan. 1, 2002, the IRS is allowing taxpayers to use either the old or the new proposed regulations in figuring required minimum distributions for the year 2001. If you have locked yourself into an unfavorable payout strategy, take advantage of the new rules.

Joel M. Blau, CFP, is president of MEDIQUS Asset Advisors, Inc.

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