May 2002

To Our Clients and Friends:

As a follow up to some proposed rules issued early last year, the IRS recently finalized a set of regulations that apply to IRA owners and retirement plan participants—as well as to their beneficiaries. The rules generally reduce the amounts that must taken out of retirement accounts once the account owner reaches a certain point (generally April 1 of the year after turning age 70½) or after the owner’s death. Although the new rules are technically not effective until 2003, the IRS says taxpayers may elect to use them this year in determining the amounts that must be taken out of IRAs and qualified retirement plans.

Lower Required Distributions

The biggest change made by the new rules is that the IRS has updated its life expectancy tables to reflect current (improved) life expectancies. Because of this change, individuals who are taking required minimum distributions from an IRA or retirement plan will generally be able to take a little less each year if they prefer.

Example: Paul turns 77 this year and his wife, Ernestine, who is the beneficiary of all of his IRAs, will be 75. At the end of 2001, his traditional IRA balances totaled $500,000. Under the rules that existed prior to the issuance of last year’s proposed IRS rules, the amount he would need to take from one or more of his traditional IRAs in 2002 was $31,646 ($500,000 ÷ 15.8), assuming he elected to recalculate his and his wife’s life expectancies each year.

Under the 2001 proposed rules, the required distribution for this year falls to $24,876 ($500,000 ÷ 20.1). However, should Paul choose to use the 2002 final regulations to calculate this year’s required distribution (and there’s no reason not to if he wants to take out the smallest amount possible), the amount he must take is only $23,585 ($500,000 ¸ 21.2). That’s a 5% decrease from what the 2001 regulations require and a 25% decrease from what the pre-2001 rules would have required. Of course, regardless of which set of rules he chooses to follow for this year, Paul is always free to take more than the minimum amount without penalty because he is over age 59½.

Beneficiary Selection

The new rules also emphasize the importance of carefully considering who is named as primary and secondary beneficiary on all of your IRA and retirement plan accounts. Failure to consider the tax consequences of naming certain types of beneficiaries (such as a charity, trust, or your estate) can cause unintended (and undesirable) results. Thus, this would be a good time to look at all of your IRA and retirement plan accounts and make sure your beneficiary selections are current and that the tax ramifications of your selections contain no surprises.

This is just a brief summary of a couple of the major changes in the new rules. Please call us if you’d like more information about how the rules will apply in your particular situation.

Best regards,

Carol Barsness, CPA

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*This artilce is presented for information and educational purposes only and is not intended to constitute legal, tax or accounting advice. The article profices only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional advisor.

All Content Copyright ©2002 - CW Barsness, CPA