04/17/2002

Good news for IRA owners: the IRS said yesterday that it is simplifying the rules you use to figure out how much you must withdraw from your traditional IRA.

This is an important development not only for the estimated 34 million American households that own traditional IRAs, but also for IRA beneficiaries.

The new rules generally mean you won't have to withdraw quite as much from your IRA as you did before, said Ed Slott, a CPA in Rockville Centre, N.Y., and editor of "Ed Slott's IRA Advisor," a monthly newsletter.

As a result, you'll save money in taxes (because withdrawals from traditional IRAs are taxable). It may not amount to much for many IRA owners, "but whatever it is, it'll save them a few bucks," said Slott, a nationally recognized authority on IRAs.

The new rules also mean you won't have to do the complex calculations yourself, or hire someone to do them; banks, mutual funds and other financial institutions that serve as custodians or trustees of IRAs will do the calculations for you, starting in January 2003.

Although the new rules generally take effect next year, IRA owners (and beneficiaries who've inherited IRAs) will have the option to use them right now, saving them money, Slott said.

About 44.3 million U.S. households own some type of IRA, according to a survey last year by the Investment Company Institute in Washington, D.C., a trade group for the mutual fund industry.

Of those, about 34.1 million households own traditional IRAs, making the traditional IRA the most common form of IRA ownership, the trade group's survey found.

The new rules mainly affect retirees who are required to withdraw at least a minimum amount of money from their traditional IRAs each year, starting for the year in which they turn 701/2.

In general, each such withdrawal is subject to federal income tax (and state and local tax, depending on where you live). For this and other reasons, many IRA owners try to keep the amount of each such withdrawal to an absolute minimum.

The new rules put in place yet another new set of tables that IRA owners may use to figure out the amount of each such withdrawal. These new tables generally will allow IRA owners to withdraw an even smaller amount each year than required under the old rules. This will not only save them money, but also allow more money to stay in their accounts, and continue growing on a tax-deferred basis.

"Taking current longevity into account, these tables provide for distributions to occur over a longer period than previous tables," the IRS said.

The new rules update a set of proposed regulations that the U.S. Treasury posted in January 2001, which themselves made simpler the process of calculating withdrawals from traditional IRAs.

"These [January 2001] rules won praise last year for making it easier for retirees to take funds from their retirement plans," IRS Commissioner Charles O. Rossotti said yesterday. "The comments we received helped us to simplify the rules even more."

Last year's proposed regulations introduced a new uniform table that many IRA owners began using to calculate their required minimum withdrawals.

The rules the IRS announced yesterday introduce a new uniform table (and other new tables) that IRA owners may use. Slott offered this basic example:

Suppose you're a 75-year-old IRA owner with a $100,000 account balance. Under the rules the Treasury posted in 2001, you generally would have divided the account balance by 21.8. As a result, you would have had to withdraw about $4,587 from the account this year.

Under the rules the government announced yesterday, you can divide the account by a larger figure, 22.9. As a result, you get to withdraw a smaller amount, about $4,367, this year.

Because the new rules let you withdraw $220 less in this example, you pay less in tax. If you were in the 15-percent federal income-tax bracket, for example, you could save $33.

The IRS will also require financial institutions to report to IRA owners how much, at a minimum, they should withdraw from traditional IRAs, using the new uniform table.

Financial institutions will have to make the first such report by Jan. 31, 2003, telling IRA owners how much they must withdraw for 2003. (If the IRA owner is eligible to use a different table that will save more, the financial institution will have to make that calculation at the account owner's request, Slott said.)

Although financial institutions won't have to report these amounts to the IRS (which the IRS had proposed last year), they will have to identify to the IRS, starting in 2004, each IRA for which a required withdrawal must be made.

The new rules affect not only the owners of traditional IRAs, but also beneficiaries who have inherited IRAs. Owners (and beneficiaries) of employer-sponsored plans, such as SEP-IRAs and SIMPLE-IRAs -- will also be subject to the new rules. The new rules will also affect beneficiaries of Roth IRAs.

Technically, the new rules also affect employer-sponsored retirement-savings plans, such as 401(k) plans and 457 plans. In practice, however, many retirees wind up transferring amounts in these plans over to IRAs.

TODAY'S TIP: The new rules are to be published shortly in the Federal Register -- the official daily publication for various branches of the federal government. It's available in many public libraries, and on this U.S. Government Printing Office Web site:

www.access.gpo.gov

Slott said he plans to post the new tables on his Web site:

www.irahelp.com

He will also publish details in next month's issue of his monthly newsletter. (To subscribe, call 1-800-663-1340; the newsletter costs $79.95 a year.)

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 or toll-free at 1-888-697-7656 and leave a message. Sorry, no personal replies; as many questions and issues as possible will appear in this column.