New IRS rules simplify  retirement plan withdrawals

Generally, you must begin withdrawing money from tax-favored retirement plans in the year you turn 70 ½. This includes traditional IRAs, qualified retirement plans, and annuities. It does not include Roth IRAs, and if you’re still working at age 70 ½, you generally can wait until you retire to begin taking money from a qualified plan.

If the withdrawal rules apply to you, you can postpone your first withdrawal until April 1 of the year after you turn 70 ½. After that, you must withdraw a minimum amount each year by December 31.

The old rules
Under the old rules, you were required to choose a beneficiary and one of several complicated methods to calculate your minimum withdrawal.

These two choices had to be made when you took your first required withdrawal. They determined the amount you were required to withdraw from your retirement accounts each year. Once you made your initial choices, your decision could not be changed.

The new rules
The new rules allow you to change beneficiaries and previous distribution methods. Now you can use one simple chart to calculate your minimum required distributions. And you have more flexibility in choosing or changing a beneficiary.

Using the new chart results in a smaller required distribution for most people. Since you aren’t taxed on retirement accounts until money is withdrawn, the less you take out, the less tax you pay. This allows more money to be left in your retirement plan to grow tax-deferred for your future use or for your heirs.

One rule hasn’t changed. You can still withdraw more than the required amount from your retirement accounts, but if you fail to take at least the minimum distribution on time, you must pay a 50% penalty tax on the amount that should have been withdrawn.

Reporting requirements
Because the old distribution rules were so complex, it was almost impossible for the IRS to enforce the 50% penalty for failure to withdraw the required minimum amount. In addition to creating simplified rules for distributions, the IRS has created a new reporting system that will make it easier to enforce the rules.

Banks, brokers, and other custodians of retirement accounts will be required to report your minimum distribution to you and to the IRS. This will alert the IRS if you fail to take your distribution on time, so they can charge you the 50% penalty.

Effective date
The new rules have been issued as proposed regulations with an effective date of January 1, 2002. However, the simplified rules applied to 2001 distributions for IRAs.

These new rules make calculating your distributions simpler, but retirement plan rules remain complex, and they differ for each type of retirement plan. For assistance, please call us.