05/13/2002

Have you inherited an IRA? In April, the U.S. Treasury published new rules and tables to help you figure the minimum amount you must withdraw each year from your inherited IRA, based on a figure that corresponds to your age in the government's new "life expectancy" tables.

How will you benefit? Ed Slott, 47, a CPA in Rockville Centre, N.Y., and publisher of "Ed Slott's IRA Advisor" newsletter, is a nationally recognized authority on IRAs. Before holding a recent seminar in Avon, Conn., for financial advisers, he talked about the new rules with Providence Journal MoneyLine columnist Neil Downing. Excerpts follow:

Q: These rules apply to owners of IRAs. Do they also apply to beneficiaries?

A: Yes. . . . Beneficiaries will use the [new] "single life" table [to calculate required minimum withdrawals, also known as required minimum distributions.] . . .

Q: Will the new table help them?

A: Yes. They can withdraw less . . . and they can stretch out the life of the IRA a bit longer. . . .

Q: Is that the only benefit?

A: No. The big benefit . . . is [that] beneficiaries can use this table regardless of when they inherited. Now, this could make a huge difference for certain beneficiaries who inherited many years ago, under the old rules, and had poor distribution options. . . .

Most people who inherited an IRA before now are affected [by the new rules], and it could make a huge difference in how long the IRA stays alive. . . .

Suppose you have a beneficiary who may be 40 years old now. He may be stuck with a [withdrawal] schedule . . . that leaves him with only maybe four years left until the account has to be emptied.

Q: In that case, what can happen thanks to the new rules?

A: The new rules say he can go back and reconstruct his life expectancy based on this new table. Here's what that means:

Let's say the death was in 1992. He goes back to 1993, which is the year after death, and he gets to reconstruct life expectancy as if these [new] tables were in effect back then.

. . . [The beneficiary in our example] was 31 in 1993. So he would go to this "single life" table and look up [the factor that corresponds to] age 31, which is his age in the year after death. . . .

[Under the new rules, he would use a factor of] 52.4. So that becomes his new "life expectancy" -- 52.4 -- and he subtracts "1" for every year that's passed since then. . . .

Nine years have passed . . . so [for 2002] he comes up with [a figure of] 43.4 years.

Under the old rules, he had only four years left until the account had to be emptied. Under the new rules, now he has 43.4 years left . . . [As a result, the IRA] will last 10 times longer in that example. . . .

Q: So suppose there's $500,000 left in that account.

A: Under the old rules, he knew that, in four years, it was going to be over; [he had to withdraw the entire amount].

Because of these [new] rules, he's going to take what's left of that account -- $500,000 -- and be able to stretch it out another 43.4 years.

So this is huge for certain beneficiaries who had poor options, because their parents didn't know the rules back then [or other reasons.] . . .

Q: What if you inherited from the estate of the IRA owner, instead of directly from the IRA itself?

A: If you inherited from the estate, you were never a designated beneficiary to begin with . . .so you're not going to get relief there. . . .

So if you are a designated beneficiary of an IRA you inherited, and you've been withdrawing the minimum amount each year from the account based on the old rules, you may now switch to the new rules? And, as a result, you can withdraw less money each year, pay less tax, and stretch out the life of the IRA over an even longer period of time?

A: Yes -- not only save money in tax, but you can also thwart the elimination of your inherited account. . . .

So most beneficiaries will find an extended payout period because of these new rules -- if they're made aware of it. . . .

Q: An "extended payout period" means the beneficiary gets more years to make withdrawals?

A: Right. Instead of having to dump the account in 4, 5 or 10 years, maybe he can go 30 or 40 years . . . and make the IRA last for decades longer than it would have under the prior rules.

And that is new with these April 2002 final regulations. That switching was never allowed. As a matter of fact, in the proposed regulations from January 2001, that was one of the questions: Do these rules apply to these old beneficiaries who may be stuck? And [the IRS] didn't answer it. Now, they're answering it, and saying every [beneficiary] may use these [new rules, in 2002], and must use them [in 2003 and later.] . . .

Q: How many people do you think this will affect?

A: Could be tens of millions. Look, as IRA owners start to die, there'll be more and more beneficiaries. . . .

Q: Someone who's inherited an IRA, what should they do?

A: Your best bet is to go to a financial adviser who's familiar with these rules -- and that may be hard to find, but they're all learning it, because I'm teaching them all over the country. [Go to] a financial planner, whoever you rely on for your retirement-account advice, and have them switch you to the new rules. You could do it yourself, too, but you'd like some guidance because it's so new. . . .

Q: The new rules apply to people who inherit traditional IRAs. But do they also apply people who inherit Roth IRAs?

A: Yes, and this is a common mistake. . . . Roth IRA owners are never subject to required distributions, but their beneficiaries are . . .

The only exception to that rule is if your beneficiary is your spouse. [In that case], he or she can roll over [an inherited traditional IRA to their own traditional IRA, or an inherited Roth IRA to their own Roth IRA], and now they're the owner, so they don't have to take distributions. . . . For more information about the new rules, and about Slott's newsletter, see his Web site:

www.irahelp.com