Newsletter for May 2001

Article Briefings
Naming the Right Beneficiary Can Benefit You
Putting a (Rough) Price Tag on Your Dream
Exit Strategies
Unwise Wisdom: Don't Touch Your Retirement Money Until You Retire
Immediate Annuity May Be Good Fit for Some Retirees

FAQ of the Month
What is the deal with the new rules about IRA minimum distributions?

Resource Links
IRS Publication providing IRA basics

Naming the Right Beneficiary Can Benefit You By Terry Savage,, Barron's Online: 02/07/01.

Naming a beneficiary extends the growth of certain assets and simplifies the distribution process. Too often, mistakes are made, potentially subjecting heirs to heavy estate taxes and creating a host of other monetary problems. The number one mistake is the failure to name a beneficiary. A simple solution to this problem is to check your retirement account for a listing of heirs. Another common mistake is naming a minor as a beneficiary. If a person dies before their child reaches age 18 - without setting up a trust mechanism - the state determines where the cash is invested and when it is withdrawn. By setting up a trust and naming a friend as trustee, the money will remain "safe" until the child reaches age 18. Another mistake is naming the wrong beneficiary. Although it seems natural to name your spouse as the beneficiary of your Individual Retirement Account, it could be costly. Instead, leave your already-taxed assets to your spouse and leave your retirement assets to someone younger - that way, those assets will have time to grow, tax-deferred.

Putting a (Rough) Price Tag on Your Dream By Mary Beth Franklin,, Kiplinger's: Vol. 55, No. 3, Pg. 48, 03/01.

The closer you get to retirement, the more closely you need to examine your financial needs. Because income will be available from different sources at different times, Kiplinger's recommends knowing exactly where your retirement money will originate. In addition to knowing the source(s) of retirement funds, you should also know how much of that money can be safely withdrawn each year, without running out of funds. Filling out a worksheet to get a quick overview of your retirement needs, writes Mary Beth Franklin, is paramount. Six steps are required to complete the early-out worksheet. They involve determining your needed retirement income; the amount you will get from social security and pensions; the size of the nest egg you will need; how much you have already accumulated; how much you will draw from home equity; and how much more you need to save.

Exit Strategies By Mary Beth Franklin,, Kiplinger's: Vol. 55, No. 3, Pg.38, 03/01.

Millions of Americans dream of retiring early. A recent survey by the National Council on the Aging (NCOA) found that while one in four workers aims to retire by a certain age, seven out of ten hope to call it quits as soon as they can afford it. Many are looking to their portfolio rather than a calendar to control when they retire. As baby boomers reach retirement, the idea of retirement is changing from a time of relaxation to a time for new careers, volunteer work, travel, or other activities. You can tap an IRA before age 59-1/2 by setting up a schedule of substantially equal payments based on your life expectancy. As long as that payment stream lasts for at least five years and until you are at least 59-1/2, there is no penalty on the payouts. Creating a budget for how much you plan to spend and tallying up your sources of income is the ideal way to determine if you can retire early, or if you are likely to fall short of your goal.

Unwise Wisdom: Don't Touch Your Retirement Money Until You Retire By Jeff D. Opdyke, Wall Street Journal: Vol. 105, No. 8, Pg. R10, 01/29/01.

Conventional wisdom tells us that retirement money is for retirement. If you decide that funds set aside for retirement must be used today, however, there are certain penalty-free tricks to drawing on both IRA and 401(k) funds. The Internal Revenue Service (IRS) generally does not allow access to retirement accounts until a person has reached 59-1/2. If you yank money out of a government-recognized retirement account, you will incur both federal and state taxes. You can get your 401(k) money, however, via a loan or hardship withdrawal. Since you incur no penalties with a loan, this is usually the preferred alternative. IRS rules allow 401(k) participants to borrow as much as half of the value of their 401(k) plan or $50,000 -- whichever is smaller. Typically paid back through payroll deduction, an employee can repay the money over a period of five years. In order to receive more money than a loan will allow, the only other option is a hardship withdrawal. The IRS has a number of rules that regulate hardship withdrawals. Designed to meet immediate financial needs, hardship withdrawals require the termination of the 401(k) plan. Although IRAs permit withdrawals at any time, doing so incurs penalties and taxes. Early IRA withdrawal penalties can be waived for disabilities expected to last for the rest of a person's life. In addition, penalties can be waived for substantial medical expenses, an unemployed person's medical insurance, a first-time home purchase, or higher-education expenses.

Immediate Annuity May Be Good Fit for Some Retirees By Katie Kuehner-Hebert,, American Banker: Pg.12A, 04/18/01.

For retirees who want added security that they will not outlive their savings, "immediate" annuities may be the way to go. Immediate annuities are life insurance products that provide retirees with guaranteed streams of income for the rest of their lives. Paul J. Coleman, manager of Investors MarketPlace at Park Bank of Milwaukee, says a growing number of retirees are seeking such guarantees. John M. Fenton, a principal with Tillinghast-Towers Perrin, predicts that interest in immediate annuities will only increase among retirees, as people rely less on Social Security and defined benefit pension plans and recognize the need to guarantee at least a portion of their savings.

Q. What is the deal with the new rules about IRA minimum distributions?

A. This was a confusing issue even for tax professionals. We'll do our best to clarify it here.

On January 17, 2001, the Internal Revenue Service (IRS) distributed proposed regulations related to required minimum distributions from Individual Retirement Accounts (IRAs) and other qualified plans. The proposed changes attempt to simplify the current proposed regulations from 1987, although their level of success is debatable.

First, it is important to remember that many proposed regulations require several years of public comment and revision prior to their publication as final regulations. Some proposed regulations are ultimately withdrawn by the IRS and never make it to the final publication stage. This means that the current proposed regulations may not come into effect at all, or may be further modified before they are made final.

With that in mind, we can sort out some confusion regarding the "effective date" of the new proposed changes. The IRS originally proposed that the new rules would become effective after 2001, but suggested that taxpayers could elect to use them for determining required minimum distributions during calendar year 2001. In other words, a taxpayer could elect to use the new rules at any time during 2001, although they would not become required until after December 31, 2001.

The IRS then clarified its guidance in Announcement 2001-18, 2001-10, I.R.B. The new rules may be used during 2001 with the following exception: they may not be used with reference to tax year 2000 minimum distributions, which are required to be made by April 1, 2001. To determine those distributions, the taxpayer must still use the prior proposed 1987 era regulations. Presumably, distributions relative to tax year 2001, particularly those taken after April 1, 2001, may be determined using the new proposed regulations.

Furthermore, the IRS has warned IRA plan sponsors not to amend their plan documents until the publication of final regulations. The IRS also will not issue model IRA plan documents on the basis of the January 2001 publication of these proposed regulations.

Although this makes it difficult for the taxpayer to plan future distributions, it highlights the need for taxpayers to keep in touch with their CPA or professional financial advisor to handle these tricky regulations changes.

If you wish to do more in-depth reading about these proposed regulations, including revised tables, they can be found in their entirety, online:

1) Go to (this is a very large page).

2) Scroll down to "Internal Revenue Service."

3) Under "Internal Revenue Service," choose the section called "Income Taxes." Under that section, find the item labeled "Retirement Plans; required distributions, 3928-3954 [01-304]."

4) Next to this item, choose to view either the [TEXT] version or [PDF] version (you need Adobe Reader to view a PDF file).

5) Be patient, because this is a very large file. Your ability to access it will depend on your system and Internet connection.

Readers will soon see that, while some small steps were taken in reducing this overly complex area, there is much more work to be done prior to rendering the issue intelligible to the taxpayer.

This IRS Publication provides IRA basics from the perspective of the Internal Revenue Service. To view online, go to:

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