Figuring Required Minimum Distributions
As you are approaching retirement, consideration
should be given to when to begin taking distributions from your qualified plans
and IRAs. In addition to restrictions on when you can start taking money from
your retirement accounts, the IRS also has requirements concerning
distributions you must take. In the case of a qualified plan in which you
participate, you are required to begin taking at least minimum distributions
starting April 1 of the year following the year in which you reach age 70 ½ or
retire, whichever is later. In the case of your IRAs, you must begin
distributions starting April 1 of the year following the year in which you turn
70 ½, regardless of whether you have retired. If you have enough other assets
for your support, you probably want to minimize distributions from your retirement
plans so that your plan assets can continue to accumulate tax-deferred as long
as possible. New tax rules will help you achieve this goal. While you must
still begin taking minimum distributions from your accounts as of your required
beginning date, the new rules reduce, often dramatically, the annual amounts
you are required to take. (If you have a Roth IRA, the news is even better.
Since contributions to a Roth IRA are the result of after-tax dollars, no tax
is generally due on distribution after retirement age, and there is no
requirement that you distribute your account balance according to any
particular schedule.)
The minimum amount that must be distributed
from your retirement accounts depends on your life expectancy, or the joint
life expectancy of you and your spouse if your spouse is more than 10 years
your junior. If the required amounts are not distributed, a 50-percent excise
tax is imposed on the amount that should have been distributed but was not.
Under the old rules, you had to choose among
two or three methods of figuring your required minimum distributions. The new
rules simplify your calculations greatly. In order to determine the amount of
the minimum distribution you must receive for a year, you will now simply
locate your current age on one uniform table each year to obtain the updated
number of years over which your benefits are expected to be paid. That number
will then be divided into your account balance as of the end of the previous
year to give you the amount that must be distributed to you for the current
year. The table you will use is the same table that will be used by all
retirement plan participants to calculate their required distributions. (In the
only exception to this new uniformity, a participant whose spouse is more than
10 years younger may use the old joint and last survivor table to stretch out
and reduce annual payments even more.)
Not only is the new one-step procedure
simpler, it is also more liberal. Most participants will find that their
pay-out period is appreciably longer and their required distributions
considerably less than would have been the case under the old rules. As your
payments are reduced, more of your money can stay in your account and continue
to grow tax-deferred; and your annual tax liability, of course, shrinks along
with your required distributions.
At the same time you are arranging your
post-retirement finances, you can also incorporate some estate planning. Also
with simplification in calculating your benefits, the new rules will also bring
greater flexibility and opportunity in the designation of your beneficiaries.
You may now change beneficiaries as often as you like before your death, and it
will not affect the amount of your annual contributions (unless, of course, you
are moving into or out of a beneficiary relationship with a spouse more than 10
years younger). If your heirs are faced with changed conditions following your
death, there is an opportunity for them to rearrange your pre-death beneficiary
choices so they can accommodate the new conditions. If you have named more than
one beneficiary or more than one level of contingent beneficiaries, your
primary beneficiaries can disclaim, or waive their right to, the benefit they
entitled to receive, and thereby cause that benefit to pass to the next
beneficiary or level of beneficiaries. This gives you the opportunity to plan,
before your death, how to cover as many post-death bases as possible. If you
would like to make sure your spouses's financial needs will be taken care of
after your death, but you would also like to let your assets continue to
accumulate on a tax-deferred basis and eventually provide an inheritance for
your children or grandchildren, you should name your spouse the primary
beneficiary and your younger heirs the secondary beneficiaries. If your spouse
doesn't need your retirement plan assets for his or her support after your
death, he or she has until the last day of the year that follow the year of
your death to disclaim any interest in your account assets. This allows that
amount to pass directly to your younger beneficiaries as if your spouse had
never been named a beneficiary at all. Payments will then be made over the
longer life expectancies of the younger beneficiaries, leaving more assets to
accumulate on a tax-deferred basis in your account.
After your death, your remaining plan assets
will be paid to your beneficiary over his or her lifetime (unless you or your
plan provide for a shorter distribution period). If you die before naming a
beneficiary, but after the date the IRS says you must begin distributions from
your plan, your remaining plan assets will be paid out over a period equal to
your life expectancy immediately before your death unless your plan calls for a
shorter period. If you die before that date without having named a beneficiary,
your plan assets must be paid out within five years of your death.
Working within the distribution rules, you
must make decisions about your post-retirement finances and planning your
estate. If you want to know more about the rules and how they work best in your
situation, please do not hesitate to call our office.
