WASHINGTON Millions of retirement savers and their beneficiaries just received an unexpected gift from the Internal Revenue Service: simplified rules for withdrawing money.
The proposed changes in regulations, effective immediately, will streamline the confusing decision-making process that currently plagues retirement plan owners. The new rules also will permit retirees to change beneficiaries and fix previous distribution elections.
At issue are IRS rules that determine the minimum amount retirees must begin to withdraw from IRA plans and other tax-favored retirement plans on April 1 of the year after they turn 70 1/2.
The old rules required that they choose a beneficiary and a method of calculation, irrevocable decisions used to determine the retirees life expectancy. The number of years was then divided into the account balance to arrive at a minimum distribution.
The new rules eliminate all those calculation choices and basically provide one simple chart to determine life expectancy. The result: smaller minimum distributions for most people.
"American families will do better under the new rules," said accountant Ed Slott, publisher of the monthly newsletter Ed Slotts IRA
Advisor. "If you can take out less, you will pay less in tax, and that leaves more money to build up in the estate for your beneficiaries."
The IRS has a big stake in the rules: It wants to make sure it collects tax on the distributions. When the current rules were introduced in 1987, no one paid much attention, because IRAs were in their infancy, Slott said.
Now, retirement accounts often surpass homes as Americans single biggest asset. At the end of 1999, retirement assets totaled $12.7 trillion, according to the Investment Company Institute.
Yet the current rules are so complex, experts say theyre almost unenforceable. The new rules make calculations easier and help the IRS track minimum distributions, said Eric Donner, head of RDS Inc., which trains financial professionals on retirement distribution rules.
Failure to comply with the rules still results in a 50 percent excise tax on the amount that should have been withdrawn.
The new rules become final on Jan. 1, 2002, after public hearings.
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