Individual Retirement Accounts

What the New IRS User Friendly Distribution Rules For IRAs Mean to You

By Joseph T. “Chip” Buxton III, attorney

On January 11, 2001, the IRS issued new rules for IRA owners. If you are approaching 70* or have already begun to withdraw from your Individual Retirement Arrangement (IRA), or you have retired and hold a 401 K or 401B retirement plan account, the IRA distribution rules released by the IRS on January 11, 2001, are good news. You are required under most retirement arrangements to begin withdrawing from your account for the year you reach 70* . The actual withdrawal can be deferred to April 1 of the following year but in that year you will need to take two withdrawals. One for the year you are 70* and one for the year you are 71.

The IRS has issued a new uniform withdrawal table, which permits the owners of Individual retirement Accounts and most similar plans to defer withdrawals over a longer period of time, taking out less each year and permitting the account to grow on a tax deferred basis for the remainder of the owner’s life. Married couples, in most cases, no longer have to use the old joint life expectancy tables, which resulted in generally faster payout from the account and in some cases, immediate payout within a year from the death of the owner. In addition the new rules permit the IRA owner to change their designated beneficiary or beneficiaries any time before their death. This effectively eliminates the old requirement to “lock in” to a beneficiary’s age at the Required Beginning Date when the owner reached 70* .

Under the new rules, the beneficiaries will be determined on December 31 on the year after the owner dies. This new rule permits, post mortem opportunities for rearrangement of the distribution of the IRA proceeds. When an individual passes away owning an IRA, the beneficiary, under the new rules, may withdraw the IRA based on their individual life expectancy under the IRS individual life expectancy table. Under the old rules, the IRS required the family to use the age of the oldest beneficiary. Under the new rules and IRA can be divided into individual shares for each named beneficiary and each beneficiary may use their individual age to determine payout. For example, a 17-year-old beneficiary under the new rules, has a 64.2 year life expectancy, and therefore would be able to withdraw the proceeds from an IRA account over the 64.2 life expectancy. This would result, for example, in a 17 year old who inherited a $100,000 IRA to withdraw over his or her lifetime a total of over $800,000. Since the account will continue to grow during the child’s lifetime tax deferred and the child will only be required to withdraw the amount dictated by his or her age in the year of withdrawal.

IRS Withdrawal Table

Age Applicable Divisor
70 26.2 86 13.1 102 5
71 25.3 87 12.4 103 4.7
72 24.4 88 11.8 104 4.4
73 23.5 89 11.1 105 4.1
74 22.7 90 10.5 106 3.8
75 21.8 91 9.9 107 3.6
76 20.9 92 9.4 108 3.3
77 20.1 93 8.8 109 3.1
78 19.2 94 8.3 110 2.8
79 18.4 95 7.8 111 2.6
80 17.6 96 7.3 112 2.4
81 16.8 97 6.9 113 2.2
82 16 98 6.5 114 2
83 15.3 99 6.1 115 1.8
84 14.5 100 5.7
85 13.8 101 5.3

If you are 70* and are presently withdrawing from your retirement account, or are approaching 70* , make sure you study the new rules in determining your withdraw from your account, beginning this year 2001. If you are trying to defer your withdrawal for the longest possible period, the application of the new uniform table will reduce your annual withdrawal and achieve substantial income tax savings for you by deferring income to future years. Your spouse will still have the opportunity to rollover the plan at your death into his or her own plan and use their own life expectancy to determine withdrawal. Your children, if they are beneficiaries, will be able to use the single life withdrawal tables to determine their individual withdrawals and your account may be split into several accounts for multiple beneficiaries.

While the new rules are tax payer friendly, they still are complex. Make sure you get competent advise in determining the best strategy for withdrawing from your IRA and naming beneficiaries for your accounts.

Joseph T. Buxton III is an estate-planning attorney with offices in Yorktown and Urbanna Virginia. Mr. Buxton is a graduate of William & Mary Law School, Denison University and has studied professional financial planning at Old Dominion University. He is a member of the Virginia and Florida Bars, the National Academy of Elder Law Attorneys, and the Financial Planning Association.