Slow Down, You Move Too Fast - individual retirement accounts - Brief Article

Kiplinger's Personal Finance Magazine, April, 2001 by Kevin McCormally

RETIREMENT | New IRA PAYOUT RULES allow most investors to get more out of this tax shelter.

IN THE "59th Street Bridge Song" Paul Simon followed the lyric above with, "You've got to make the morning last." If the staff at the IRS were songwriters, they could substitute "money" for "morning" and have a groovy tune to introduce the new IRA distribution rules.

"Slow down" is good advice to anyone who is required to take money out of an IRA this year. Chances are you can put the brakes on withdrawals so your money will last longer. Check with your IRA sponsor before you withdraw another dime.

The new rules, which are retroactive: to January 1, sweep away the sickening complexity that used to surround calculating how quickly retirees had to deplete traditional IRAs. Under the old rules, the pace was based on the owner's life expectancy (or the joint life expectancy of the owner and a beneficiary). At the same time, owners were forced to make an irrevocable decision about how to calculate life expectancy after the withdrawals began. The labyrinthine rules seemed designed to trick taxpayers into making costly mistakes.

Under the gloriously simplified regimen, regardless of who you name as your beneficiary--or even if you have no beneficiary at all--you will be treated as if your beneficiary is ten years younger than you are. Required payouts from the account will then be based on the joint life expectancy of you and that imaginary younger beneficiary. (There is one exception: If your beneficiary is your husband or wife--and he or she is more than ten years younger than you--you can use your actual joint life expectancy to stretch out withdrawals even further.)

Figuring out required distributions will be a snap. You simply divide the amount in your IRA at the end of the previous year by a number found in a table published by the IRS. Your IRA sponsor can provide the table, or you can visit our Web site (www.kiplinger .com) and use our calculator to determine your minimum distribution.

For example, for someone who turns 70 in the first half of 2001, the appropriate divisor is 26.2. If you have $1 million in all of your traditional IRA accounts, you divide $1 million by 26.2 to find that you are required to withdraw $38,168 for the year. (You can always withdraw more than the minimum if you need to; withdraw less, however, and the IRS can claim 50% of the shortfall.)

To see the power-to-the-taxpayer promise of the new rules, consider the worst-case scenario under the old regime. A 70-year-old who had no named beneficiary--or who had named a charity, say, rather than a person--was assigned a 16-year life expectancy. Dividing $1 million by 16 meant a first-year mandatory withdrawal of $62,500.

Since every dime withdrawn from a traditional IRA is taxable (except to the extent it represents nondeductible contributions made to the account), the new rules could cut the tax bill in this example by about $7,500 for a taxpayer in the 31% bracket. And more money stays inside the IRA to flourish in a tax-deferred environment. (The mandatory-distribution rules do not apply to Roth IRAs. The original owner of a Roth is never required to withdraw funds from it.)

Beware of misinformation. The rush to spread the word about the new rules has resulted in some wrong-headed reports. No matter what you've heard or read, the liberalized rules do not apply to required distributions for 2000 that have been postponed until 2001. Taxpayers who hit age 70 1/2 last year have the right to put off their first withdrawal until April 1 of this year. But that required withdrawal is still based on the old rules.

What about reports that you can name a beneficiary for your account as late as December 31 of the year following the year of your death? Well, the IRS may consider itself all-powerful, but the agency still hasn't figured out how to-raise the dead. Although you no longer have to name a beneficiary by April 1 of the year after you reach 70 1/2, you must name one while you're still breathing to give him or her the greatest flexibility in deciding how fast to deplete the account. References to postdeath planning have to do with new opportunities when two or more beneficiaries are named.

--Reporter: ERIN BURT