Good news! There are new proposed Regulations that will affect distributions from IRAs, annuity contracts, 403(b) plans, and qualified retirement plans. Assuming, as expected, that they are adopted, they will apply to calendar years beginning on or after January 1, 2002. For IRA distributions in calendar year 2001, you can either rely on the new rules or follow the existing ones. As to distributions from qualified plans, the plan must be amended before you can use the new rules.

How the New Rules Could Benefit You

You would no longer have to make a choice among three methods for calculating the minimum required distributions from your IRA or qualified retirement plan. While the new rules would not change the deadline for starting the distributions (April 1 following the year you attain age 70½), they would provide a single, quite favorable computation method.

Your choice of beneficiaries under the new rules would have no effect on the minimum distributions from your IRA or other qualified retirement plan. Whether you name a 30-year-old, an 80-year-old, or a charity as beneficiary, the amount you are required to withdraw each year is the same.

Under the new rules, after starting withdrawals and until you die, you could substitute or add beneficiaries without affecting the minimum withdrawal schedule.

Your beneficiaries would have attractive new options for receiving benefits. Depending on their circumstances following your death, some of them might elect to disclaim their interests, some might choose to be cashed out, and others might prefer to receive payments for life. Each beneficiary can choose how to receive benefits as late as December 31 of the calendar year following the year of your death.

The minimum amount you must withdraw from your account would probably be reduced. That is because the withdrawal period under the new rules would be the joint life expectancy of you and a beneficiary who is presumed to be ten years younger than you. The only exception to this new uniform withdrawal schedule is if your spouse is more than ten years younger. Then you can use your actual joint life expectancy.
Taking less out of your account leaves more to continue growing on a tax-deferred basis, which allows you to accumulate more for heirs or for your own future needs.

New Rules Don't Eliminate Double Taxation of Funds

Distributions from IRAs and qualified retirement plans will continue to be subject to income tax. The tax is paid by the recipient - by you while you are receiving payments, by your beneficiaries following your death.

In addition to income taxes, the assets of IRAs and qualified retirement plans may be subject to estate tax. The fair-market value of these assets will be included in your estate and, along with all other estate assets, will be taxed if your total estate exceeds the amount that can be exempted. In the event your spouse is your only beneficiary, your retirement funds will qualify for the estate-tax marital deduction and, consequently, will not be taxed on your estate-tax return. However, any funds remaining in the account at your spouse's death will be includible in his or her estate and may be subject to estate tax at that point. Your beneficiaries are entitled to an income-tax deduction for the amount of the net federal estate tax paid on the funds they receive.

Even so, the combination of income and estate taxes could total more than 70 percent of your accumulations, depending upon applicable tax rates. Although possible income- and estate-tax reductions would provide some relief, IRAs and qualified retirement funds are likely to continue to be the most heavily taxed assets that you can leave to heirs.

Using IRAs and Qualified Retirement Funds for Charitable Gifts

Under the new rules, it makes more sense than ever to use IRAs and other retirement funds for your end-of-life charitable gifts. As before, you will likely save more taxes when you give these assets than you would if you gave securities, real estate, or cash. But now there is the added benefit of simplicity.

Consider first the continuing tax benefits. The funds from the IRA or qualified retirement plan that you leave to charity (such as the University of Dayton) qualify for an estate-tax deduction and avoid income taxes because the charity is tax-exempt. Thus, you can make a significant charitable gift at relatively little cost to your heirs.

Under the new rules, all you have to do is name the charity as beneficiary of a portion of your IRA or qualified retirement funds. Following your death, that portion of leftover funds will be paid to the charity in a lump sum, totally tax-free. The balance can be paid to beneficiaries according to whatever schedule you and they elect, and the charitable gift will not affect that distribution schedule. If family circumstances change, you can alter the percentages by completing a beneficiary designation form. This does not necessitate a change in your will.

For More Information

For a more detailed explanation of the proposed new rules regarding distributions from IRAs and qualified retirement plans and a discussion of family and charitable options with these funds, please e-mail us at: gift@udayton.edu for a complimentary copy of our new booklet, Distributions from IRAs and Qualified Retirement Plans.