ShareThisBy ALAN S. NOVICK
Thursday, November 02, 2006
The latest individual retirement account distribution rules together with other changes this year make IRAs easier and better tax planning devices for retirement.
IRAs have always offered tax advantages while allowing the employee to set aside money for retirement, but in the past investing in an IRA often proved more confusing than comforting.
Previously, a very complex method of calculating minimum distributions was the law. The new method uses one constant, understandable table based solely upon the life expectancy of the IRA owner.
A participant can change beneficiaries at any time and without being penalized by having to restructure an entirely different distribution chart.
The new minimum distribution table also reflects more realistic life expectancies. And, it is OK to leave money in the account for a longer period of time, allowing it to accrue more interest, tax free, and build a larger balance.
Even though the employee will be taxed on the money as he withdraws it from the account, under this system amounts left in the account grow tax free and also much faster.
The IRA is set up so that the owner may not take money out of the account without being penalized until age of 59 1/2. The owner must begin taking out the minimum distribution amount by April first of the calendar year following his or her turning 70 1/2.
The advantage of the new distribution rules is that, at this age, the owner is assumed to have a life expectancy of 26.2 years. This is a longer life expectancy than expressed in the previous table. Consequently, the owner is only required to withdraw 1/26.2 (or 3.8167 percent) of his or her funds, thus accumulating interest on the remaining 96.1833 percent balance in the IRA.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304(at)aol.com.)
