For some Individual Retirement Account (IRA) holders who are approaching the mandatory distribution age (April 1st of the year after the year they attain age 70½), their primary concern may be stretching their account assets over their lifetimes and those of their spouses. Maximizing tax deferral and/or passing these assets to their heirs may be of lesser importance. Others, however, who are fotunate enough to enjoy sufficient retirement income from other sources, may wish to extend the tax deferral as long as possible.
Regulation reform finalized in 2002 makes this task much easier. In response to Americans living longer, healthier lives, the Internal Revenue Service (IRS) increased the life expectancy figures on which required minimum distributions (RMDs) are based. As a result, RMD amounts have decreased, and IRA owners are now allowed to withdraw less than was necessary under the original distribution rules. For most, RMDs are calculated using a uniform table (uniform life), which assumes a beneficiary is 10 years younger than the owner, regardless of the beneficiary's actual age. If the IRA owner has named his or her spouse as the sole beneficiary, and he or she is more than 10 years younger, a second table (joint life and last survivor) may be used to calculate their actual joint life expectancy.
Married individuals quite often name a spouse as the beneficiary of an IRA. If the IRA owner dies prior to, or after, the mandatory minimum withdrawal date, only a surviving spouse can choose to make an inherited IRA his or her own. This would postpone mandatory distributions until April 1st of the year after the year in which he or she reaches age 70½.
In contrast, a nonspousal beneficiary is more limited and must begin taking distributions from an inherited IRA by the end of the year following the year of the owner's death. With the legislative changes, however, the consequences of beneficiary choices are no longer dependent on whether the IRA owner died before or after starting the required withdrawals, simplifying planning decisions. Unlike the old rules, such distributions no longer must continue to be based on the owner's original life expectancy calculation, but may now be stretched out over the life expectancy of the beneficiary, significantly extending the potential benefits of tax deferral.
What's the Advantage?
These simplified rules should make it easier for some retirees to meet the minimum distribution requirements, thereby avoiding unnecessary penalties, while enabling the greatest possible build-up of tax-deferred assets. However, IRA owners should be aware that any such build-up could potentially lead to higher estate taxes down the road. If you have an IRA and have attained (or are approaching) age 70 1/2, it may be best to consult a qualified tax and financial professional for assistance with your particular circumstances.
Securities offered through Walnut Street Securities, Inc. (WSS). Member NASD & SIPC.