04/30/2002

Yikes! I've been writing a lot recently about the new rules to use to figure out how much you must withdraw, at a minimum, from your IRA once you reach a certain age. Only lately have I paused to listen to what some readers have to say. And what, exactly, are they saying? They don't believe it.

With reference to your article . . . Last year, they said they had come up with a new table . . . and you could use that one for 2001. You're saying they've come up with another table . . . I wanted to make sure that I'm reading it right.

L.H., Union, N.J.

Yes, you are. As a result, you won't have to withdraw as much from your IRA. That'll save you money in taxes, and let you keep more in your account, to keep growing.

But it's no wonder you're confused. The issue itself is complicated to begin with.

The rules say you must withdraw at least a minimum amount from your traditional IRA each year. You must make the first such withdrawal for the year in which you turn 701/2.

To calculate how much you must withdraw, you generally use your account balance and a key figure that you find in an official government table. You divide your account balance by that figure. The result, in general, is the amount you must withdraw.

It's tricky stuff, but it's vitally important to millions of IRA owners nationwide. Here's why:

You must withdraw enough. If you don't, you could get slapped with a whopping 50-percent penalty. (The penalty is applied to the difference between what you did withdraw and what you should have withdrawn.)

You don't want to withdraw too much. In general, every dollar you withdraw is subject to federal income tax (and state and local income tax, depending on where you live). So the less money you withdraw, the lower your tax bill. And if you can minimize your withdrawals every year, more money can stay in your account, to continue growing on a tax-deferred basis, and help provide income in your later years.

The problem is that the government has been changing the rules lately:

In 1987, the U.S. Treasury published a bunch of rules and tables for IRA owners to use in calculating minimum withdrawals (technically known as "required minimum distributions," or RMDs.)

In January 2001, the Treasury published another bunch of rules and tables.

In mid-April 2002, the Treasury published yet another bunch of rules and tables.

See the problem? For nearly 14 years, the rules and the tables stayed about the same. Then, within a period of about 15 months, the government changed the rules and tables -- twice.

Small wonder, then, that many IRA owners are confused. That's the bad news.

The good news is that, in general, the latest rules and tables will give you a break. The April 2002 tables are even better than the January 2001 tables (which themselves were a big improvement).

By using the new tables, you'll generally get to make smaller withdrawals. This will save you money in taxes.

But there's something else that may be even more helpful: because more money gets to stay in your account, your IRA may now last longer than you had planned, said Marvin R. Rotenberg, national director of retirement services at Fleet Bank's Private Clients Group. So there's less chance now of exhausting the amount you put aside in your IRA to help provide for your retirement years, said Rotenberg, a nationally recognized authority on IRAs and retirement plans.

For an example of how the new tables work, and for information on how to get ahold of these tables, keep reading:

At the beginning of every year, the bank will tell you what you have to take out [of your traditional IRA]. I'm 73 . . . The bank says they'll use a figure of 23.5. You're saying in the paper I'll use a figure of 24.7 . . . Which is right?

L.C., Pawtucket

Use the figure of 24.7 to calculate how much you must withdraw, by Dec. 31, 2002, for this year.

The factor the bank cited -- 23.5 -- is from last year's table. Under the new rules just published by the government, you may use new tables, and a new key factor that corresponds to your age -- 24.7.

Suppose, for example, that your IRA had a balance of $200,000 as of Dec. 31, 2001. If you divided that by 23.5, which is what the bank told you, you'd have to withdraw about $8,511 this year.

But if you divide your account balance by 24.7 (using the new tables), you'll have to withdraw only about $8,097.

In other words, because of the new tables, you'll get to withdraw $414 less. If you pay federal income tax at a rate of 27 percent, you'll save about $112 this year alone. (In general, the bigger your account balance, and the higher your tax bracket, the more you'll save.)

Keep in mind that the bank's notice to you a few months ago was based on the rules and tables that were in effect at the time. The government just published new rules and tables; it'll take some time before your bank can put them into effect.

TODAY'S TIP: If you have access to the Internet, and want to get more information about the new rules for required withdrawals from IRAs, the following Web site focuses exclusively on this subject:

www.NewRMD.com

It's run by a company in Florida, Brentmark Software Inc., that creates computer software and offers other services for financial professionals and consumers. From this site, you may read and download copies of the new rules, including the new tables.

The site also offers a summary of various news articles on the topic, as well as a summary of reports by experts. The site also includes links to the full articles and reports.

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.