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Required
Minimum Distribution Rules Change
The
Retirement Research Foundation recently reported that a person reaching age 65
today can expect to live well into his or her 80s.1
In response to rising life-expectancy rates, the IRS has updated its rules for
required minimum distributions (RMDs) from traditional IRAs and
employer-sponsored retirement accounts.2 The
new rules calculate RMDs using the latest life-expectancy tables and give plan
owners the potential to withdraw less each year, reduce current income taxes,
and stretch tax-deferred savings.
Although the IRS initially proposed a simplification of RMD rules in early 2001,
the latest rules, finalized in April 2002, go even further to potentially
benefit taxpayers. Changes include:
 | Allowing couples with a
considerable age disparity or young beneficiaries to use RMD calculations
that take into account multiple life expectancies.
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| Eliminating certain
variables to simplify RMD calculations.
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| Clarifying the rules
for dividing accounts among multiple beneficiaries.
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| Changing the deadline
for designating a beneficiary.
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| Requiring IRA trustees
to notify owners of their RMD amount, beginning in 2003, and to notify the
IRS about RMDs that are due each year, beginning in 2004.
For the 2002 tax year, taxpayers may use the original rules established in
1987, the temporary rules proposed in 2001, or the rules finalized in 2002.
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 Despite
favorable changes, the laws governing RMDs are still fairly complex, and the
penalties for noncompliance can be severe — up to 50 percent of funds that
should have been withdrawn but weren’t. Keeping pace with IRS rules and
steering clear of penalties may require considerable effort, but knowing the
facts could also mean significant savings. Be sure to consult a tax professional
about your situation.
1) The Retirement Research Foundation, 2000
2) Distributions from traditional IRAs and employer-sponsored retirement plans
are taxed as ordinary income and, if taken prior to reaching age 59½, may be
subject to an additional 10 percent federal tax penalty.
© 2002
Emerald Publications
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