FIDELITY/RETIREMENT: GETTING YOUR MONEY OUT OF AN IRA JUST GOT EASIER
IRAs have been a wonderful tool for building retirement nest eggs for fund investors . But until recently, getting money out of them came with plenty of confusion. Now, thanks to the IRS making things simpler---yes, simpler--- that has changed for the better.
One of the ugly things about IRA investing were the IRS rules regarding the required minimum distribution (RMD) date, which is the latest date you can put off taking money out of your IRAs. That date is April 1 of the year following the calendar year in which you reach age 70 1/2. Thereafter, distributions must be drawn by December 31 of each year.
Getting at that money meant choosing beneficiaries and selecting one of three methods for calculating RMDs. Now that's changed and although three calculation methods still exist, there's a far simpler way for calculating RMDs based around one new uniform chart.
"They've now come up with a divisor which most people will use unless they happen to have a spouse that's more than 10 years younger then they are, " "says Peter Smith, vice president in Fidelity Investments Institutional Services Company.
Under the old guidelines, beneficiaries had to be named before you started taking distributions. Not so now. This doesn't mean you can forget about naming them; it just means the new proposal is more flexible regarding them.
Bottom line it and these changes can mean fewer headaches when it comes time to deciding who you'd like to inherit you IRA monies, how long the money lasts, and, the possibility of a lower tax bite from Uncle Sam.
For full details about the proposed IRS regulations, please make sure to consult your tax adviser for the particulars. Until then, here's more from Smith about the new regulations: The changes came as pretty much of a surprise to the (fund) industry. And, reasons for the changes centered around investor complaints.Officially, the proposed changes go into effect Jan. 1, 2002. However, anybody taking distributions from an IRA this year, in 2001, can take advantage of them, if they wish.What hasn't changed is the premise that you have to begin taking your money out of your IRA at age 70 1/2. That's still true. What has changed is the calculation method used. It's now much simpler and as a result, two key things are important. One is, you can reduce your required minimum distribution (RMD), and therefore, reduce your tax liability.
The other, you can leave the IRA to somebody else in what's called a "stretch" IRA, or "stretch out" IRA, which was always technically possible but because of decisions that people had to make prior to age 70 1/2, wasn't utilized much. Now creating a stretch IRA is much easier.Here's an example of how someone's taxes could be lowered using the new regulations:
Because there's just one simple table to use (that applies to most). look up your age, get a divisor, divide that into the size of your IRA and that provides your minimum distribution. (Note: If your spouse is the beneficiary of your IRA and he or she is more than 10 years younger than you, a different calcuation table needs to be used. It can be found at www.irs.gov.)
Let's say you're 72 this year and have a $500,000 IRA. Under the old regulations using a single recalculation method, the required distribution would be $34,247, because the life expectancy would be14.6 years. Using the new table, with the divisor assuming your beneficiary is not more than 10 years younger than you, the new divisor becomes 24.4 instead of 14.6, and as a result your RMD is lowered to $20,492.
The tax liability using the old regs is $34,247, and, if taxed at 28 percent, would amount to $9589. A 28 percent tax using the new regulations on $20,492 is $5,738. Here's an example regarding the new regs and a stretch IRA:
Let's say that you're 38 years old today and inherit a $500,000 IRA. Using the new regs, the new RMD would be based on a life expectancy of 43 1/2 years. If you're taking the minimum distribution and the rest of the money gets reinvested at the rate of 8 percent per year, is compounding annually, and then taxed at 33 percent on everything that's drawn out, by the time you are 68, you would have withdrawn $1.6 million from that IRA, have $1.7 million left, and 13.5 years of remaining payments.
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