An Individual Retirement Account (IRA) can make saving and investing for retirement a whole lot easier. IRA account owners can contribute up to $2000 per year tax deferred before they retire. Funds in the account may be withdrawn as early as age 59 1/2 (at the latest by April 1 of the year after you turn 70 1/2) in order to avoid additional taxes or penalties - at which time of withdrawal they become subject to federal income taxes.

New Regulations

On January 12, 2001, the IRS announced a number of proposed regulations changing the way in which yearly Required Minimum Distribution (RMD) amounts from Retirement and IRA accounts are calculated. The new regulations, which help both account owners and their beneficiaries, are scheduled to take effect for calendar years beginning on or after January 1, 2002. However, owners and beneficiaries can choose to follow the new rules when determining their RMDs for calendar year 2001-even if their RMDs have already begun.

A Simplified Process

Under the old regulations, your RMD depended on your choice of beneficiary and on which of three distribution methods you selected. Moreover, after age 70 (the age at which RMDs must commence), you were prohibited from changing your distribution method. The proposed regulations do away with much of this complexity. For example, account owners will no longer have to choose between single or joint life expectancies; nor will they have to worry over whether it makes financial sense to recalculate their life expectancies.

The proposed regulations use a uniform lifetime distribution period that, generally, doesn't vary with the age of your beneficiary and a single easy-to-use table to automatically calculate yearly RMDs. In most cases, this results in smaller RMDs than under the old rules, which will help stretch out your IRA for a greater number of years, reduce your federal tax bill and allow more of your retirement assets to be passed on to your beneficiaries.

Under the proposed regulations, every IRA owner's RMD will be calculated using a table that assumes the IRA owner has a beneficiary who is 10 years younger. The only exception being if your sole beneficiary is your spouse and your spouse is more than 10 years younger-in which case you have the option of using the regular joint life expectancy table. (If more than one beneficiary is named you must use the new RMD table during your lifetime.)

More Flexible Distributions

The proposed regulations allow IRA account owners over the age of 70 to change their beneficiaries as often as they want, without increasing the RMD. Such changes can even be made "after death"- in that a designated beneficiary need not be determined until December 31 of the year following the owner's death.

Surviving spouses can make inherited IRAs their own only if the RMD for the owner's year of death has already been distributed. In addition, the surviving spouse must be the account's sole beneficiary and have an unlimited right to take withdrawals.

Under the old rules, a surviving spouse who was named as a designated beneficiary had the option of "disclaiming" or refusing all or a portion of an inheritance. This passed the account (or remaining portion thereof) to whomever was legally next in line. Usually, this was the account owner's son or daughter, whose RMD was determined by the surviving spouse's life expectancy. The new rules continue this practice, but allow sons and daughters to stretch inherited IRAs over their own-much longer-lifetimes.

In cases where an account names two or more beneficiaries, the new rules allow an inherited IRA to be split into separate accounts. Each beneficiary then uses his or her own life expectancy to calculate their own RMD. Note, however, that if a beneficiary is not chosen by the end of the year following the owner's death, all of the money in the account must be withdrawn within five years.

What's Not Changing

As the current or prospective owner of an IRA account, be aware that a number of important provisions remain untouched by the proposed changes. The IRA is still subject to federal estate taxes at your death - although the estate gets a deduction for the portion of your IRA that is left to your spouse. And, failure to take the annual RMD by the required distribution date will continue to result in a 50% federal excise tax penalty.

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