If you have funds in a tax-deferred retirement plan such as an IRA, when you reach age 70 you must begin taking minimum distributions from that plan or pay a hefty additional tax on the amount that should have been distributed. Until recently, structuring these minimum distributions was a complicated business that if not done properly it could have serious tax consequences. New rules issued by the Internal Revenue Service, however, have streamlined the process considerably and should reduce the required distributions for most people.
One of the difficult choices the old rules required was which of several life expectancy tables to use. Under the new rules, beginning with required 2001 distributions, you can consult one simple chart to determine your required distributions. This change in the rules will reduce almost every account owner's lifetime minimum distributions. This in turn will allow you to accumulate more money in your retirement accounts, tax-deferred.
Another fateful choice under the old rules was the choice of your beneficiary for the retirement plan funds. You had to name your beneficiary when you began making distributions, and failure to name one usually resulted in your heirs taking distribution of the entire retirement plan within five years and paying income taxes on those distributions during that time.
The new rules postpone the date for determining designated beneficiaries until December 31 of the year following the year of the retirement account owner's death. This means that your designation of a beneficiary (or your failure to name one) will rarely result in the kinds of tax-planning disasters that were common under the old rules. In most cases, your heirs will be able to take steps that will ensure deferral of taxes on retirement accounts over their lifetimes.
For more details on the new rules, as well as other retirement planning tips, go to our Retirement Planning section.