In
addition to the restrictions on when a taxpayer can start taking money from retirement
accounts, the IRS also has requirements concerning distributions that must be
made. In 2002, the IRS simplified the computation of an individual's required
minimum distribution. Use of the regulation became mandatory on January 1, 2003.
In
the case of traditional IRAs, distributions must begin no later than April 1st
of the year following the year in which the taxpayer turns 70½, regardless
of whether or not retired. While the taxpayer must begin taking minimum distributions
from their accounts as of the required beginning date, the new rules reduce, often
dramatically, the annual required distributions. Subsequent annual distributions
must be made before December 31st of each taxable year. Therefore, it is often
advisable for the IRA holder to take the initial distribution before December
31st of the year that he or she turns 70½ instead of waiting until April
1st of the following year. Waiting means taking two distributions in the same
tax year (the first one before April 1st, the other before December 31st).
The
minimum amount that must be distributed from retirement accounts depends on the
taxpayer's life expectancy, or the joint life expectancy of the taxpayer and his
or her spouse if the spouse is more than 10 years younger than the taxpayer. If
the required amounts are not distributed, a 50% excise tax is imposed on the amount
that should have been distributed but was not.
Under
the old rules, taxpayers had to choose among several methods of figuring their
required minimum distribution. The new rules simplify the calculation greatly.
In order to determine the amount of the required minimum distribution for a given
year, the taxpayer will now simply locate their age as of December 31st of that
year on one uniform table to obtain the updated number of years that the benefits
are expected to be paid. That number will then be divided into the account balance
as of the end of the previous year to give the amount that must be distributed
during the current year. That table is also used by all retirement plan participants
to calculate their required distributions. Remember, the only exception is for
a participant whose spouse is more than 10 years younger. In this situation, the
old joint and last survivor table may be used to stretch out and reduce annual
payments even more.
Not
only is the new one-step procedure simpler, it is also more liberal. Most participants
will find that their payout period is appreciably longer and their required distributions
considerably less than what would have been the case under the old rules. Since
the required distributions are reduced, more money can stay in the account and
continue to grow tax-deferred. The taxpayer's annual tax liability, of course,
shrinks along with the required distributions.
If you would like any further information regarding this issue as well as any other tax related issue, please contact The Henssler Financial Group Tax & Accounting Division at 770-428-4025.
