For 14 years, rules about withdrawing money from an IRA during retirement stayed basically the same. Since January 2001, they’ve changed twice, and radically. The new rules affect a huge number of people and in a very big way. To save you the trouble of reading 149 pages of new rules from the IRS, here’s a plain-English version covering the essentials you need to know.
Tables Are Set. The law requires that once you turn 70½, you begin making annual IRA withdrawals. The IRS provides tables showing the smallest amount you can take out each year, based on your age-your required minimum distribution (RMD). But the new rules presume substantially longer life expectancies than the original 1987 IRS tables, and that translates into substantially smaller RMDs. For instance, a 70½-year-old couple using the old table had a 20.6-year life expectancy, compared with 27.4 years under the new rules. To get your RMD, the IRS divides your retirement account assets by your life expectancy, and a larger divisor means a smaller RMD. Assuming you don’t need to withdraw more than the minimum, you’ll benefit from having lower taxable income, and the extra money that stays in the account will continue to compound tax-deferred. You can always take more than your RMD without penalty, but your RMD sets the minimum.
Spouses Rule. Under the old rules, if you named your spouse as beneficiary of your IRA video porno, you had to determine your joint life expectancy and then use a table to find your RMD. Now, there’s a single table that assumes your spouse is 10 years younger than you are. However, if your spouse is more than 10 years younger, you can calculate your RMD using his or her actual age in a separate IRS joint life expectancy table.
Birthday Trap. Although RMDs are generally lower under the new rules, they’re lowest for retirees with birthdays in the first half of the year. That’s because those who turn 70½ in January through June get to use the RMD for 70-year-olds-27.4 years-whereas those born after June have to use the 26.5-year life expectancy for 71-year-olds.
Non-Spouse Beneficiaries. If you want to change the beneficiary of your IRA from your spouse to your children or someone else, it will not affect your RMD-whereas under the old rules it might have affected your RMD. Unlike the old rules, which allowed you to recalculate your life expectancy with a non-spouse beneficiary, now you simply use your IRS life expectancy table.
When You Die. If your spouse is the beneficiary of your IRA, he or she has two choices when you die: keep the IRA in your name and continue withdrawals based on the same schedule; or roll the IRA into his or her own name and take RMDs based on his or her life expectancy. It’s often wise to roll it into the surviv-ing spouse’s name and specify new beneficiaries-perhaps your children. The new rules let your children inherit your IRA and take RMDs based on their life expectancies-an enormous benefit. Because a 60-year-old, for example, has a much longer life expectancy than an 80-year-old, the younger person can stretch IRA withdrawals over a much longer span, leaving the balance to grow tax-deferred for decades.
After You Die. Post-mortem planning is possible under the new rules. If an IRA names several beneficiaries at the time of death of the IRA owner, they have until September 30 of the year after the year of the death of the IRA owner to decide who will be the beneficiary for purposes of calculating the RMD. Suppose a wife is the beneficiary of her husband’s IRA, and a child and the husband’s favorite charity are secondary beneficiaries. When the husband dies, if the wife does nothing, the RMD will be based on her life expectancy. But if she doesn’t need all of the money in the IRA to live on, she can disclaim all or part of her share, and the remaining beneficiaries can take distributions that are best for them. A charity, for instance, has no life expectancy and will get its share in one lump sum and pay no tax on it. A child or children can inherit the IRA in separate shares and calculate the RMD based on their ages.