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New Required Distribution Rules for Retirement Plans

We often remind our clients, life and estate planning is a "process," not a one-time event. The IRS recently illustrated this point by announcing sweeping changes simplifying the rules regarding mandatory distributions from individual retirement accounts (IRAs) and 401(k) plans. The changes will benefit most taxpayers who understand how they affect their own personal planning decisions.

These changes permit reduced required distributions for (almost) everyone who is already past his or her required beginning date. For most people, the required beginning date is April 1 following the year in which the participant attains age 70 1/2. Additionally, the new rules may permit some favorable change in the required distributions for anyone who has inherited a retirement plan. For those IRA and 401(k) plan participants who are looking to withdraw the minimum amount from their retirement account, the new rules will result in a lower income tax bill, a longer-lived tax shelter, and potentially larger payouts to the participant's family members.

To summarize briefly, there are three main areas affected by the new rules:

Lifetime Required Distributions: The method for calculating lifetime required distributions both at and after the "required beginning date" has been simplified resulting in smaller minimum distributions for many people.

After-Death Required Distributions: Required distributions to your heirs are based on their life expectancies, rather than on the often-complex strategies required by the old rules giving you more flexibility in naming beneficiaries.

Determination of Life Expectancy: There is now one method for determining life expectancy. The new rules extend the life-expectancy period for most people, which means you may leave more in your account to continue to grow tax-deferred.

If you are 70 1/2, if you are taking mandatory withdrawals from a retirement plan you inherited, or if you are contemplating retirement this year, you should contact us to determine how the new minimum distribution rules affect you, your family, and your current financial plan. It would be preferable to review your situation before you take your required distribution for the year 2001 to determine how these new regulations may affect you.

Another planning issue that could have an impact on you and your family is your choice of "designated beneficiary." It still remains extremely important to make the right choice of "designated beneficiary" to maximize tax deferral opportunities. As a result of the change in the law, participants have greater flexibility in naming charities and younger generation individuals, such as grandchildren, as the beneficiaries of their plan benefits. Any person who is past their required beginning date should review their choice of beneficiary, since there is now a chance to change to a more "favorable" choice for after-death distributions.

If you are younger than 70 1/2 and you are not taking distributions from any inherited retirement plan, the new rules, for now, have no direct effect on you. So, pass this article along to an older friend or relative.

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The Bloomington, Indiana, law firm of Mallor Clendening Grodner & Bohrer LLP handles a wide range of legal issues and provides a lifetime of solutions to clients throughout Central and Southern Indiana including those from Monroe County and from cities and communities such as Bloomington, Evansville, Indianapolis, Bedford, Bloomfield, Franklin, Martinsville, French Lick, Paoli, Columbus, Spencer, Mooresville, and Seymour.