A New Deal for Retirement Plans
Edition: October 2001 - Vol 9 Number 10
Author: Richard Yercheck
In January, without fanfare, the IRS issued some very welcome new regulations, making income tax planning for distributions from IRAs and tax-deferred retirement plans a much simpler task. Best of all, for most retirees who have no immediate need to withdraw funds from their tax-sheltered retirement plans, the new regulations offer the chance for smaller distributions and longer deferral of income tax.
The law allows untaxed growth and compounding of assets in IRAs and company retirement plans. However, it insists that the tax deferral must come to an end at some point, and a series of taxable required minimum distributions (RMDs) must begin.
In IRAs these distributions must begin when the owner reaches age 70 1/2, with the first distribution occurring no later than April 1 of the following year. For company plans the date may be laterany time up until the employee actually retires. These age requirements have not changed. But much else has.
The new rules
The previous regulations were complicated and confusing, even for professionals. Many of the complications concerned the calculation of RMDs, especially when joint life expectancies of the owner and a named beneficiary were to be part of the calculation.
Now the IRS has provided a table that nearly anyone may use to determine RMDs. The distribution periods in the table are equal to the longest that were offered under the old system. As a result, more money can grow tax deferred, undisturbed for a longer time period.
There is one exception to the standard table, and it's a taxpayer-friendly one: The distribution period can be even longer when a spouse is named as sole beneficiary, and that spouse is more than ten years younger than the IRA owner or plan participant. In that case the period will equal the couple's joint life expectancy from IRS tables.
Beneficiaries for an IRA or retirement plan distribution no longer need to be named at the time that payments begin. Nor will IRA owners and plan participants have to make any irrevocable choices at that time. A new rule even allows a beneficiary to ''disclaim,'' or refuse, the inherited IRA or plan distributions. This option can allow the IRA or plan distribution to pass to an alternative (and presumably younger) named beneficiary.
In another change from the previous regulations, a beneficiary now, in most cases, may spread distributions from an inherited IRA over his or her own lifetime.
While the rules for Roth IRAs are different, the new regulations will apply to beneficiary distributions from those accounts after the death of the owner.
The new rules are in place
Although the new regulations are labeled ''proposed,'' they may be relied upon immediately. An IRA owner or plan participant also may choose to use the old rules instead. Finally, the IRS assures us, should any of these new rules change, there will be no negative consequences for anyone who has relied upon them.
Should You Borrow From Your 401(k)?
With certain restrictions, many companies allow their employees to borrow money against their 401(k) account. But is it a good idea?
Your savings won't be drained (1) as long as you pay at least as much interest as you were earning on your 401(k) investments and (2) as long as you repay the loan.
The interest you pay, usually 1 percent or so above the current prime rate, goes back into your account.
There are limits on the amount you can borrow.
Loans are usually short term.
Interest payments usually aren't tax-deductible.
If you leave the company, you have to repay the loan or it will be subject to taxes and penalties.
In the final analysis, it's probably better to think of a 401(k) loan as a last resort. When you compare cost, repayment terms, and tax treatment, there are other credit options that make better financial sense, such as a tax-deductible home equity loan.
ABOUT THE AUTHOR: Richard Yercheck is a Financial Consultant with IJL Wachovia in Charlotte, NC. He can be reached for comment at 800-929-0724 ext. 9514. IJL Wachovia is one of the nation's largest full-service, regional, brokerage firms, offering a full range of investment services to investors.