Retirement funds may last longer under new IRS rules

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New simplified IRS rules governing distributions from retirement plans can help the retirement nest egg last longer.|ret||ret||tab|

The good news for anyone who has an Individual Retirement Account or other qualified retirement plan such as a 401(k) or 403(b) is that the calculation of minimum distribution is now easier and the life-expectancy period is generally longer. |ret||ret||tab|

With smaller minimum distributions, retirement money has an opportunity to last longer.|ret||ret||tab|

The IRS recently announced proposed regulations, effective immediately, establishing one uniform method for calculating distribution of retirement plan assets in tax-favored plans. |ret||ret||tab|

Account holders can use either the old rules or the new rules this year. |ret||ret||tab|

If the proposed regulations become more restrictive when finalized by the IRS, the restrictions will not be retroactive. |ret||ret||tab|

At the beginning of 2002, everyone will be using the new rules.|ret||ret||tab|

The new rules affect anyone who is 70 1/2 or older or anyone who has recently inherited an IRA. |ret||ret||tab|

As a result, most people will be able to take smaller sums from their retirement plans each year, lowering their income taxes and allowing their assets the potential to grow tax deferred for a longer period of time.|ret||ret||tab|

Under the old rules, the IRS required every owner of an IRA or other qualified retirement plan at age 70 1/2 to choose one of three complex formulas for determining how much must be withdrawn from a retirement plan annually. Once the calculation method was chosen, it could not be changed.|ret||ret||tab|

In the past, if an account holder made a poor choice on the calculation method, that method had to apply in calculating required distributions each year whether marital or financial situation changed. Most people didn't really understand the impact of their decision on which calculation method they chose until they were handcuffed.|ret||ret||tab|

In many cases, the inflexibility of the distribution rules adversely affected the beneficiary of an IRA after the original IRA owner died. In most cases the beneficiary who inherited the IRA suffered the consequences of the poor decision-making.|ret||ret||tab|

For example, under the old rules, a married couple who chose the "recalculation" method of determining their annual retirement plan distributions would have to accelerate distributions when one of the spouses died. |ret||ret||tab|

When the surviving spouse subsequently died, then surviving beneficiaries, such as the children, would be required to receive the entire remaining plan balance in the year following the parent's death, thus resulting in a sizable tax bill.|ret||ret||tab|

Under the new rules, you will never see a forced lump-sum distribution like that. Beneficiaries will have a period of years to receive the money and pay income taxes on it.|ret||ret||tab|

The new rules, which revise regulations that have been in place since 1987, also address beneficiary designations. Under the old rules, if you changed your beneficiary on your IRA after reaching age 70 1/2 for example, from your spouse to your children the children were required to take the distributions based on the spouse's shorter life span. That would mean the children would have to take larger distributions than if the distributions were calculated to be taken over their own life expectancy.|ret||ret||tab|

The new rules permit beneficiaries to be changed as often as needed. It is not until the year following the IRA owner's death that the determination of the beneficiary's life expectancy is made, and that's to their advantage.|ret||ret||tab|

Retirees and prospective retirees should talk with a financial consultant about which retirement plan is right for them and how these new rules may affect it.|ret||ret||tab|

|bold_on|(Timothy M. Reese is vice president, Investments, A.G. Edwards & Sons Inc., Member SIPC.)|bold_on||ret||ret||tab|

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