For those of you who have IRAs, 401(k)s, and other individual accounts in an employer-sponsored defined contribution plan (such as a profit-sharing plan), you might be interested in learning about the new regulations passed by the Internal Revenue Service regarding these types of accounts.

            When you reach a certain age, for most 70 ½ , you must begin taking minimum annual distributions from your IRA or qualified plan.  With these new regulations, the IRS has simplified and liberalized the rules that determine the required minimum annual distribution that must be withdrawn from these types of retirement accounts. In general, you will have to withdraw less each year under the revised rules than you did under the pre-existing rules. For those of you looking to withdraw the rock-bottom minimum from your retirement plan account, these new rules will generally allow you take a smaller required distribution. A smaller distribution translates into a smaller tax bill each year and a continuing tax shelter for the family.  Of course, for those of you who want to take more than the minimum required distribution, you are always free to do so 

            There are three major simplifications and liberalizations that you should be aware of:

            (1)            Simplified payout rules means smaller distributions for most people. Under the new rules, one simple table is used by virtually all people to calculate the minimum required annual distribution from IRAs and other individual accounts in an employer sponsored defined contribution plan. ( The one exception is where a spouse is more than ten years younger than the employee or IRA owner, in which case a “joint and survivor” table is used to figure minimum payouts.) Under the prior rules, the minimum annual distribution depended on a host of complex factors.

            If you are already receiving required distributions (or are about to start), please contact your financial advisor to discuss how your distributions will be affected by these new rules. If you want to withdraw the absolute minimum from your IRA, you will have to tell the custodian or trustee of your account to make smaller payments to you.

            (2)            New rules for post-death payouts. The balance remaining in a retirement account such as an IRA after its owner dies must be paid out within a certain period of time. These post-death payout rules also have been simplified and liberalized as follows:

·        If a retirement account has a designated beneficiary, the account balance may be paid out over the beneficiary’s remaining life expectancy. In general, a designated beneficiary must be an individual or it may be a trust that meets certain requirements. Should you have questions about whether your trust meets the designated beneficiary requirements, please contact your attorney.

·        If a retirement account does not have a designated beneficiary, and the account owner dies after the required beginning date, the account balance may be paid out over the remaining life expectancy of the account owner, determined just before he died.

·        If the account does not have a designated beneficiary, and the account owner dies before his required distribution starting date, the account balance must be paid out within 5 years after the owner’s death.

These rules replace an incredibly complex set of rules where post-death payouts depended on the payout method chosen by the account owner.

(3)            When the designated beneficiary must be named. Under the revised rules, the designated beneficiary of a retirement account is determined as of the end of the year following the year of the account owner’s death. No longer are you locked into the beneficiary designation chosen when you turned 70 ½, as these new rules allow you to change beneficiaries easily. 

Should these new regulations be of interest to you, we recommend that you consult your financial advisor or tax attorney to discuss how the new rules affect your retirement, estate, and financial plans.