Investment Insight: Eliminating Withdrawal Pains

If you haven't conducted many retirement plan checkups with clients lately, now's a good time to start. Important new withdrawal rules promulgated by the Internal Revenue Service in January are prompting many investor questions.

“One way you can add value now is to let clients know of these changes and run the numbers for them,” says Bob Solis, branch manager of a U.S. Bancorp Piper Jaffray office in Sun City, Ariz.

The IRS announcement was so sudden that word is still getting out about the changes. The new rules involve mandatory minimum withdrawals for people age 70½ and older who own IRAs and other qualified plans, including 401(k) accounts.

Withdrawals from such retirement accounts are, of course, still taxable as ordinary income so to the extent that investors can minimize their yearly distributions, they can save money.

“In most instances, individuals will have a lower minimum withdrawal requirement [under the new rules],” says Michael Coppolo, a director specializing in retirement issues for Merrill Lynch's Private Client Group in Princeton, N.J.

The new rules simplify withdrawal calculations. They provide just one set of life-expectancy numbers. Investors simply divide their total retirement account balances (as of the end of the prior year) by the appropriate life-expectancy figure.

“You're not going to have life expectancies all over the board,” says Theresa Fry, a retirement planning specialist at A.G. Edwards & Sons in St. Louis. “In general, everyone of the same age will be using the same factors.”

The new figures assume relatively generous life expectancies, which means fairly small yearly withdrawals. For example, a 70-year-old will only need to withdraw 1/26.2 or 3.8% from his or her account for that year, reflecting a 26.2-year life expectancy. The life expectancy figures decrease gradually from there, requiring older people to take out more each year. But in all cases, the rules are as beneficial or more so than before, Fry says. And investors still have the option of withdrawing larger amounts.

The new rules also offer more flexibility in naming — and changing — the beneficiaries on retirement accounts. “The old, forced lump-sum distributions [upon an investor's death] will be gone,” Solis says. “So from the broker's perspective, it will be just as important as ever to establish relationships with the kids.”

An IRS spokesperson predicted the new rules would be published in IRS Publications 590 or 575, which deal with IRAs. Technically, the rules are still proposals, subject to a public comment period this year. Yet the IRS has said investors can use them now. They are optional in 2001 — a transition year — but will become mandatory in 2002.

Fry says she isn't concerned by the “proposed” status of the rules. After all, the prior regulations were never officially adopted after being proposed in 1987, yet taxpayers routinely relied on them. The IRS has also indicated that any rule revisions resulting from the comment period won't be retroactive.

In short, the proposed withdrawal regulations represent a step toward simplicity and a good opportunity to discuss retirement strategies with clients.

New Withdrawal Rates

Here are the new IRS life-expectancy figures for calculating minimum yearly withdrawals from IRAs and other qualified retirement plans. Investors divide their cumulative retirement plan balance, as of Dec. 31 the prior year, by the appropriate age to figure the minimum withdrawal amount. A different table applies to investors who are married to spouses 10 or more years younger.