The IRS began the year by publishing new rules on IRA distributions. These rules make it a lot easier to extend tax deferral. As in the past, minimum distributions must begin by April 1 of the year after you reach age 70-1/2.
Now, though, you do not have to make irrevocable decisions about IRA beneficiaries by that date. You can change your beneficiary designation later with no adverse tax impact. Also, there is no longer a need to make an irrevocable decision about distribution methods. You can forget about “recalculation,” “term certain,” “hybrid,” etc.
Instead, there is one distribution method for most people: the 10-year rule. You will assume that your beneficiary is 10 years younger than you are, for this calculation. That is, when you’re 70 it will be assumed your beneficiary is 60. You’ll have a joint life expectancy of 26.2 years, by IRS tables, so your minimum required distribution is 3.82% of your IRA balance (1 divided by 26.2).
If you have a $100,000 IRA, for example, you must take out at least $3,820. If you take out less, the shortfall will be subject to a 50% penalty tax.
Note: You can take out more, if you wish. However, the more you withdraw, the greater the upfront tax bill and the less that’s left in your IRA, for ongoing tax deferral.
The only exception to the 10-year rule: if your spouse, who is your IRA beneficiary, is more than 10 years younger than you are. Then you can use the actual joint life expectancy. If you are 70, for example, with a 55-year-old spouse, your joint life expectancy is 29.9 years. You can take out as little as 3.35% (1 divided by 29.9) of your IRA balance and avoid a penalty.
What happens after your death? Your spouse is the beneficiary. In that case, your spouse can claim your IRA, name new beneficiaries, and start taking withdrawals under the 10-year rule.
A non-spouse is the beneficiary. After your death, the beneficiary can stretch out distributions over his or her own life expectancy, without any 10-year rule. With a 40-year life expectancy, for example, the beneficiary can withdraw as little as 2.5% (1 divided by 40), penalty-free. Then the other 97.5% can remain in the IRA for continued tax-deferred buildup.
Thus, the new IRS rules make IRA planning much easier. If you are already taking minimum distributions, check with your IRA custodian to see if you can slow down the pace of future distributions.
