NEW IRA DISTRIBUTION METHODS:
At Last, An IRA Method You Can Understand!

What some may have thought impossible has finally taken place: the IRS has implemented new individual retirement account (IRA) distribution rules -- rules which can greatly benefit you! Fortunately, these rules also apply to other plans, such as 403(b) annuities, 401(k) and profit sharing plans. Because each type of plan must be computed separately, we will simply refer to IRAs here.

As many of you know, IRAs offer you tax advantages while allowing you to set aside money for retirement. In the past, utilizing an IRA often proved more confusing than comforting. Well, times are changing, and you may want to take advantage of the new system.

Previously, we followed a very complex method of calculating minimum distributions. There were endless combinations possible between the owner of the IRA and the beneficiary, due to the various ways to calculate life expectancies. This is no longer the case.

The new method uses one constant, understandable table based solely upon the life expectancy of the IRA owner.

How does this help you? Unlike IRAs of the past, you now have the luxury of changing your beneficiaries without being penalized by having to restructure an entirely different distribution chart.

In addition, you may now modify your designated beneficiary at any time without penalty, whereas previously you were not permitted to do so after the IRA owner reached age seventy and one half. Again, more freedom.

Furthermore, the new minimum distribution table, known as "MDIB," has been reconstructed in order to reflect more realistic life expectancies for the twenty-first century. So how does this benefit you? In a nutshell, you get to leave your money in the account for a longer period of time, allowing you to accrue more interest and build a larger balance.

Keep in mind the method in which the funds in your IRA are subjected to income tax. Rather than taxing the income in your account as it is earned, the money is taxed as it is distributed. What does this mean? This allows you to accumulate a higher principal, which will in turn accrue more interest.

Even though you will be taxed on the money as you withdraw it from the account, this system permits amounts left in the account to grow tax free (i.e., much faster).

The IRA is set up so that the owner may not take money out of the account without being penalized until he/she reaches the age of 59 1/2. The owner must begin taking out the minimum distribution amount by April first of the calendar year following his/her turning 70 1/2.

The advantage of the new MDIB is that, at this age, the owner is assumed to have a life expectancy of 26.2 years. This is a longer life expectancy than expressed in the previous table. Consequently, the owner is only required to withdraw 1/26.2 (or 3.8167%) of his/her funds, thus accumulating interest on the remaining 96.1833% balance in the IRA.

Each following year, the owner will consult the table below, and distribute the portion of his or her IRA appearing in the percentage equivalent column for their age at the end of the immediately preceding calendar year. Since no more than 55.55555% of the IRA's assets must ever be distributed in any given year, interest accumulation can go on forever, until the owner dies.

MINIMUM DISTRIBUTION TABLE

Another notable change in the guidelines pertains to charitable organizations. It is now much simpler to designate a charity as a beneficiary of your retirement account. You can choose to donate the entire amount or only a portion.

Naming a charity as your beneficiary will not in any way alter your set minimum distribution requirements. Upon death of the owner, the amount due to the charity may be "cashed out."

Why is this an advantage to you? This leaves other beneficiaries such as a spouse or children to do as they wish with the account with more leeway than they would have if the charity were still an ongoing beneficiary. Basically, this technique allows the IRA owner to include a charity as a beneficiary without increasing taxes for surviving loved ones.

Clearly, investing in an IRA is more rewarding now than ever. The IRS has established new guidelines which allow you more personal freedom not only in respect to whom you name as beneficiaries, but also in the amount of money you can accrue using this type of retirement account.

Several of the innovative amendments have been touched upon in this article. There are certainly many more advantages which would interest any one with an eye on the future.

RELATED LINKS

You can read the more about the new regulations at PGDC - Simplifying the Required Minimum Distributions Regulations As mentioned above, the new regulations make it easier to use your IRA to benefit charitable organizations.

For more news, return to the Estate Planning News subject index.

For more information, you can email your questions to giving@nationalacademies.org, and within two business days you will receive a response with information and recommendations from a development officer of the National Academies.