Enlightened New IRA Rules!

The proposed regulations on required minimum distributions of IRA_savings are a perfect example of a kinder, gentler, more user-friendly IRS. I believe that the changes are exactly what you and I would want if we had drafted them. How will the new regulations affect you? We have put together three composite client profiles to show the effect of the new regulations.

Meet Joe. Joe has been retired for almost eight years and is now 73. Joe was married, but his wife passed away two years ago. Joe has a large IRA from which he must make required withdrawals each year. Joe and his wife made some selections on the distribution of his IRA when he was age 70 1/2 that made sense at the time. However, no one could have predicted that his wife would die of a sudden illness and foil their best-laid plans. Now, under the new regulations, Joe can use a longer life expectancy and slow down the rate that he uses for distributions from his IRA. So, instead of having to withdraw 5.29% of the balance in his IRA this year, Joe can reduce his required withdrawal to 4.5%. The 0.79% difference can amount to several thousand more dollars left in a large IRA like Joe’s for further tax deferral. Another advantage is that Joe’s beneficiaries can now undo any unfortunate selections that Joe and his wife made and distribute their inheritance over their own life expectancies.

Now let’s talk about Sue. Sue is turning age 70 1/2 this year. Sue would have faced several difficult decisions about her required withdrawals from her IRA. Sue is single, and her possible beneficiaries range from her two children to her four grandchildren. Under the old rules she could designate one beneficiary and lock in a withdrawal schedule that was faster than necessary. Or she could split the IRA up into several smaller IRAs so that she could designate more than one beneficiary and leave her heirs with a more favorable option.

Now Sue can leave all of her IRA assets in one easy-to-manage account and can name as many persons as she wants as beneficiaries. When her beneficiaries inherit their portions of the IRA, they will begin taking required withdrawals over their own life expectancies. So Sue’s grandchildren can withdraw money over many, many years and benefit mightily from tax deferral in their accounts.

Finally, there’s Fred. Fred inherited a large IRA from his sister Jane. Unfortunately, Fred’s sister had not indicated a beneficiary on her IRA account. The IRA went into Jane’s estate and was heavily taxed. Worse than that, under the old rules, the IRA balance had to be distributed within five years of Jane’s death. Under the new rules, Fred can withdraw the money over his life expectancy, 35 years. Now, instead of having to withdraw heavily and pay all the tax over a five-year period, Fred can take distributions very slowly. Fred will enjoy many years of tax deferral, and his distributions will be taxed at a lower marginal tax rate.

BWFA is prepared to quantify the way in which these new tax regulations will affect your IRAs and other retirement accounts. If you would like us to review your existing financial plan or project the effect of the extra tax deferral, call us.