Newsletter for May 2002

The IRS rules for IRAs and other qualified retirement plans were just finalized in April. Look to this month's Featured Question to sort through some of the required distribution changes and simplifications that will be affecting all traditional IRA owners. The Article Briefings introduce new consumer reports on nursing homes, as well as brewing legislation for savings incentives, the growing trend of senior debt, and the rewards of investing in "immediate" annuities. Also, be sure to check out the news, to learn more about our on-line offerings!

Featured Question of the Month
Newly Finalized IRA Regulations from the IRS News
Spring Cleaning at

Article Briefings
U.S. Begins Issuing Consumer Data on Nursing Homes
Taxpayers Save as IRS Adjusts Life Expectancy Tables
American Seniors Rack Up Debt Like Never Before
Retirement Bill Lobbying Launched
"Immediate" Annuity May Be Good Fit for Some Retirees

Resource Link
Uniform Lifetime Table

Q. Are there any changes affecting Required Minimum Distributions (RMD)s in the recently finalized IRS regulations for IRAs?

A. The IRS first released its proposed regulations for IRAs and other qualified plans in January 2001. The final rules, released April 17, 2002, and effective as of January 1, 2003, generally keep last year's simplifications and add some new elements, incorporating many suggestions that were made after the proposed regulations were released. (However, the section dealing with annuity payments has been substantially changed and was issued as a temporary regulation, giving taxpayers a chance to offer additional feedback.) The final rules make it easier for taxpayers to calculate their required minimum distribution (RMD), and, in general, reduce the resulting amount. This means that people can stretch out their payments - and enjoy the tax shelter - for a longer period of time. The final rules also address a number of aspects related to the designated beneficiary, but here we'll focus on the new rules for RMD calculations.

According to the Federal Register, IRA owners must begin taking an annual RMD from their account on "April 1 of the calendar year following the calendar year in which the [taxpayer] attains age 70 1/2, even if the [person] has not retired" (Vol. 67, No. 74, p. 18988). Taxpayers determine their RMD by dividing their account balance by the appropriate distribution period. The good news is that the distribution period is now based on one uniform table, with an identical distribution period for almost all taxpayers of the same age. The table is based on the combined life expectancy of the individual and a hypothetical beneficiary who is ten years younger. If the sole beneficiary is a spouse who is more than ten years younger, it is possible to use another calculation, instead of the uniform table, which extends the distribution period. Moreover, the new rules include updated life expectancy figures that reflect projected mortality improvement through 2003. The end result is that most taxpayers can use a longer distribution period with a lower annual RMD.

After the individual's death, the RMD is generally calculated using the beneficiary's remaining life expectancy (based on the beneficiary's age in the year after the individual's death, which is reduced by one for each following year). If there is no designated beneficiary, the RMD is based on the individual's life expectancy in the year of death (and reduced by one for each following year).

In the past, RMD calculations were criticized for using too many variables that could change in the individual's life during any given year. This would complicate the calculations by creating different parameters for different times of the year and by making many people unsure how to determine the RMD accurately. In response, the final rules include some additional simplifications. For example, a person's marital status is determined on January 1, regardless of whether divorce or a spouse's death occurs later that year. If the beneficiary changes, due to a spouse's death, any changes in the life expectancy calculations will not come into play until the following year. Also, the account balance of an IRA or other qualified plan is now determined by the balance on the preceding December 31; any contributions or distributions made after that date are disregarded, when computing the RMD for the following year. For example, if on December 31, your IRA balance is $50,000, and you add $2,000 on Jan. 1 of the following year, your RMD calculation is based on the $50,000, not $52,000.

Taxpayers will also be getting additional help in calculating their RMD. The new rules specify that, beginning in 2003, banks, brokers, and other IRA trustees must report the RMD amount to IRA owners or calculate it for them upon request. The trustees are not required to report the RMD to the IRS, but, beginning in 2004, they will have to identify to the IRS each IRA for which an RMD is required. So taxpayers will also have to be extra careful to not miss any required distributions, since the IRS will have a complete report on which IRAs to check.

According to IRS News Release IR 2002-50, dated April 16, 2002, taxpayers have several options for the 2002 tax year regulations. They may use the final 2002 regulations, the 2001 version of the proposed regulations, or the original 1987 version of the proposed regulations.

With all of these options to consider and the complexity of the rules themselves (not withstanding their supposed "simplification"), we highly recommend consulting a qualified tax professional before you need to take any required distributions, and continuing to consult with them on at least an annual basis, as your situation changes and modifications to the rules are released.

Uniform Table - from Federal Register April 17, 2002 (Volume 67, Number 74, p.19012)

Spring Cleaning at has a fresh look for spring. In response to your suggestions, we've made it easier to navigate the site and find the information you need.

Remember to check our archived newsletters for useful insights on changes in IRA rules and other hot topics. Our spring-cleaning is still in progress, so check back regularly -- new information is popping up all the time!

U.S. Begins Issuing Consumer Data on Nursing Homes
New York Times [], 04/25/02, Pg. A27; Pear, Robert

The Bush administration unveiled data on the quality of care at nursing homes in Florida, Maryland, Colorado, Ohio, Rhode Island, and Washington. The project is intended to help consumers select nursing homes and to encourage the homes to correct deficiencies; however, some physicians claim that the data can be misleading because some residents are more ill than others when admitted. The data identifies a proportion of residents with bedsores, in physical restraints, who lost too much weight, who are suffering pain, who need extra help with daily activities, and who have certain infections. The statistics do not include information on employee-to-patient ratios or the number of complaints received about each home. Government officials also caution that consumers should inspect the homes themselves, observe the quality of care received, and ask for state inspection reports. The government hopes to expand the project to include data on doctors and hospitals.

Taxpayers Save as IRS Adjusts Life Expectancy Tables
USA Today [], 04/22/02; Block, Sandra

The IRS has revised its longevity tables and included them in the final version of rules concerning retirement savings withdrawals--a move that will reduce retirees' taxes. Next year, banks and other IRA trustees will have to tell retirees when they must begin taking distributions, and, in 2004, financial institutions will also have to give the IRS the names of those who must begin taking distributions.

American Seniors Rack Up Debt Like Never Before
USA Today [], 04/24/02; Dugas, Christine

Older U.S. citizens are moving away from saving and are beginning to accumulate debt; a trend that could threaten their retirement plans. Older citizens' debts tend to be caused by crises rather than casual overspending, because medical costs are a larger problem for this group. Seniors living on fixed incomes can find it hard to deal with sudden expenses, and they do not always know their rights.

Retirement Bill Lobbying Launched
Insurance Chronicle, Vol. 12, No. 15, Pg. 6, 04/09/01

The American Council of Life Insurers (ACLI) has begun lobbying for legislation that would offer more retirement savings incentives. A group of industry advocates argued that the pension reform package will provide long-term economic stimulus by encouraging Americans to save for retirement, but opponents disagreed. An official with the Pension Rights Center, a nonprofit consumer organization, countered that major provisions of the legislation would actually diminish the chances of middle class Americans receiving sufficient post-retirement incomes.

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

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 more rely less on Social Security and defined benefit pension plans and recognize the need to guarantee at least a portion of their savings.

Uniform Lifetime Table

If you would like to see the latest Uniform Lifetime Table, issued under the final regulations in April, 2002, follow the link above to the website. It is included in the frequently asked questions about IRAs.


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