Newsletter for January 2002

Determining the Minimum Required Distribution for your IRA can sometimes be a puzzler. The good news is that recent proposed changes from the Treasury Department have made it much easier. This month's Featured Question lays out the steps, along with an easy-to-use table that you can put to use today. Check out our news about online tax help coming soon. You'll also find a survey of recent financial planning news in our Article Briefings, as well as tax preparation tips from the IRS under this month's Resource Link.

Featured Question of the Month
Calculating Your IRA Required Minimum Distribution News
Prepare and file your taxes online

Article Briefings
Profit-Hungry Companies Take Ax to 401(k) Matches
Is Making Extra Payments as Good as Refinancing?
When Layoffs Loom, Decisions on 401(k) Plans Become Crucial
Survey: Obligations Keep Boomers From Retirement

Resource Link
IRS Online

Q. I need a better understanding of the process I should use to calculate the Required Minimum Distribution from my IRA. I know that I can look up the Required Minimum Distribution Period in a table. But how do I determine the correct account balance and age values to use?

A. The U.S. Treasury Department has proposed changes to simplify the Required Minimum Distribution (RMD) process. One of these changes establishes a uniform table that nearly everyone can use to determine their RMD for a given tax year. This table is called the Minimum Distribution Table. To use it, you must first identify two values: your age and your IRA account balance. Your IRA account balance is the total in your account on December 31 of the year immediately preceding the year for which distributions are being made. For example, your RMD for 2001 should be computed using the account balance as of December 31, 2000.

Your age is determined by how old you are on your birthday in the distribution year (it is NOT determined by your age on December 31 of the preceding year). For example, to compute your RMD for 2001, use your age on your birthday in 2001.

The Minimum Distribution Table is shown below. (It can be found in the Proposed Regulations, Section 1.401(a)(9)-5, Q&A 4(a)(2). To determine your RMD for the year 2001, consult the table using the following steps:

  1. Find your age on your 2001 birthday. The figure beside your age is your life expectancy factor.
  2. Divide the total value of all assets within your IRA account as of December 31, 2000, by the life expectancy factor.
  3. The resulting number is your RMD for the year 2001.

(NOTE: In general, this table should not be used in the case of an IRA owner or employee whose sole beneficiary is a spouse who is more than ten years younger. Other computation options apply. Consult your financial advisor for advice.)

The following table represents the life expectancy factors for ages 70 through 115. It is presented in three columns, in the format Age / Life Expectancy Factor.

70 / 26.2    85 / 13.8   100 / 5.7
71 / 25.3    86 / 13.1   101 / 5.3
72 / 24.4    87 / 12.4   102 / 5.0
73 / 23.5    88 / 11.8   103 / 4.7
74 / 22.7    89 / 11.1   104 / 4.4

75 / 21.8    90 / 10.5   105 / 4.1
76 / 20.9    91 / 9.9    106 / 3.8
77 / 20.1    92 / 9.4   107 / 3.6
78 / 19.2    93 / 8.8   108 / 3.3
79 / 18.4    94 / 8.3   109 / 3.1

80 / 17.6   95 / 7.8   110 / 2.8
81 / 16.8   96 / 7.3   111 / 2.6
82 / 16.0   97 / 6.9   112 / 2.4
83 / 15.3   98 / 6.5    113 / 2.2
84 / 14.5   99 / 6.1   114 / 2.2

115 and older 1.8

Overall, the Treasury Department's proposed changes will make it easier for you to determine your RMD and will probably reduce the amount you must withdraw. Some additional advantages to the changes are that they:

  • Permit you to calculate your RMD without regard to your beneficiary's age (unless it is to your advantage to do so)
  • Permit the beneficiary to be determined as late as the end of the year following the year of a person's death
  • Permit post-death distributions to be calculated based on the beneficiary's remaining life expectancy at the time of death

You may want to consult with your tax advisor to see how these rules affect you.

Tax season is nearly upon us and in response to a growing number of tax questions, will be offering access to an online tax return preparation tool.

This new product gives you the benefit of over 500 pages of tax help from one of the most respected tax research firms in the country.

Plus, you get an easy, step-by-step way to prepare and file your returns online. You can file personal federal and state returns.

All for one low price. No hidden, extra electronic filing fees!

Coming Soon!

Profit-Hungry Companies Take Ax to 401(k) Matches
Pensions & Investments [], Vol. 29, No. 25, Pg. 3, 12/01; Jacobius, Arleen.

Several companies are eliminating or slashing their 401(k) employer match in an effort to save money. General Motors, for example, is cutting its company contribution to 60 cents from 80 cents for each dollar an employee contributes, for up to 6% of the participants' pay, while DaimlerChrysler will suspend its matching contribution in January 2002. Several other firms are restructuring their matching contributions to make them more discretionary, and others are adding profit sharing on top of fixed company matches. New Jersey's Panasonic, for instance, has restructured the match in its 401(k) plan to include a 2% fixed contribution on the first 5% of pay and a 3% annual discretionary contribution by the company. Meanwhile, Visteon's suspension of its company match program is expected to save $25 million in 2002.

Is Making Extra Payments as Good as Refinancing?
Miami Herald [], Pg. 10H, 11/25/01; Bruss, Robert J.

While today's favorable interest rates may tempt many homeowners to refinance their mortgage, others are turned off by the inconvenience and complicated nature of the process. These borrowers instead may choose to save money by making extra payments on their home loan in order to pay it off early-which can yield thousands of dollars in interest savings. The additional payments--whether it totals $100 or $1,000--essentially is a financial investment at whatever interest is tied to the mortgage. Prepayment on a home loan at 7 or 8 percent allows the homeowner to "earn" that amount on their dollars--which is significantly better than other investment vehicles, such as a CD, which might yield only 2 to 4 percent. While many lenders charge a one-time fee to set up a biweekly mortgage schedule plus an annual fee for the automated electronic transactions, disciplined homeowners can make the extra payments on their own simply by dividing the monthly mortgage note by 12 and adding that amount to their remittance. They should be sure to notify the lender that extra money should be applied to principal only, and they must make sure they will not be saddled with prepayment penalties from their lender. While prepayment is a savvy move for homeowners whose mortgage carries interest of 7 or 8 percent, it is less effective for lower- priced loans. After tax deductions on interest are considered, the true cost of loans at 5 to 7 percent interest is really only about 3 to 5 percent; at such bargain rates, the rationale for paying off the mortgage early is lost..

When Layoffs Loom, Decisions On 401(k) Plans Become Crucial
Washington Post [], 12/02/01; Hinden, Stan.

Workers who lose their jobs need to know what to do with the money they have saved in their 401(k) plans, writes Stan Hinden for the Washington Post. For people who are suddenly laid off, financial advisers say they should resist tapping into their 401(k) savings to pay bills. In this scenario, advisers recommend that people first look into taking out a home-equity loan or borrowing against their life insurance to pay bills.

Survey: Obligations Keep Boomers From Retirement
National Underwriter (Life and Health Financial Services Edition) [ ], 12/04/01.

In addition to unprecedented levels of debt, baby boomers who already feel committed to financial obligations to both children and aging parents can look forward to more of the same in retirement, according to a recently released survey from Allstate. Allstate Financial's "Retirement Reality Check" noted that more than one in three baby boomers will be financially responsible for children or parents during retirement. Tom Wilson, president of Allstate Financial, said, "Our research paints a very serious picture as far as the many obligations tomorrow's retirees will face."

U.S. Internal Revenue Service

During tax season, remember that the IRS web site provides many answers to your tax questions and offers convenient access to numerous tax forms and publications. The substantial list of Frequently Asked Questions covers most of the basics in clear, succinct language and provides easy links to download related forms and publications. You'll find information about your local tax support office and, of course, filing electronically.


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