Everyone has heard the expression: “Don’t believe anything you read.” Well, that saying applies to the article that appeared last year on this site. It was certainly true and accurate when it was written, but it’s now a little outdated and obsolete. You see our friends at the Internal Revenue Service have finally issued firm rules on how to calculate the required distributions from IRAs. Until now, the only guidance was proposed regulations that were first issued in 1987 and then revised in January 2001. Now we have final rules to follow.

Putting money into an IRA has been a fairly simple task ever since the IRA was first created more than 25 years ago. For that same quarter of a century, figuring out how much you are required to take from your IRA has been a mathematical nightmare. There were numerous options and pitfalls. For some, making the wrong decision forced their heirs to surrender the IRA and pay tax on the full value of the IRA all in one year. Well, under the final regulations you can forget about it! The IRS has unearthed most of the hidden minefields and calculating the so-called “required minimum distribution” is now a simpler task.

IRA owners will receive a break under the new rules. This is because the final regulations include new life expectancy tables. The new tables reflect longer life expectancies and therefore require smaller distributions.

Under the 2002 new rules, some things haven’t changed. For example, you must still start withdrawing funds from your IRAs in the year you turn age 70.5. In addition, while you must ordinarily take the withdrawal by year-end, in the first year, you have until April 1 of the following year to disburse the IRA money. However, if you do wait until the following year, you’ll be forced to take two distributions in one year. For example, if you turn 70.5 in 2015, you can wait until April 1, 2016 to make your withdrawal based on your IRA balance as of the end of 2014. Another withdrawal will be required by December 31, 2016, based on your balance as of the end of 2015. The lesson is that for the first year of mandatory withdrawals, you should analyze your tax situation before year-end to determine whether it’s best to take the withdrawals in two different tax years or bunch the mandatory withdrawals into one year. Under the new rules, this might be the only decision you’ll have to make.

The real impact of the new rules is felt when it comes to calculating the amount of the required withdrawal. Prior to 2001, to make this calculation we needed to know the answers to a handful of questions, like: Did you opt to recalculate your life expectancy? What is the age of your IRA beneficiary? Did you change beneficiaries? Is any beneficiary a charity? All of that was history when the IRS issued new proposed regulations in January 2001, and it’s still history under the final regulations. Now all we need to know is your age and the total balance in your IRA at the end of the prior year. That’s because all IRA owners (with one exception) will be on the same, longer distribution schedule. For example, let’s say your IRA balance, as of the end of 2014, was $50,000.00. To calculate the minimum distribution for 2015, you simply divide the $50,000.00 by the divisor for your age at the end of 2014. If you are age 74, the divisor is 23.8 (under the old table the life expectancy was 22.7). Therefore, the minimum distribution for 2015 would be $2,101 ($50,000.00 divided by 23.8). The new table showing the divisor for all ages is below. The only exception to this table is if (1) you are married to a person who is more than ten years younger than you and (2) she or he is the only beneficiary on the account. In that case the required amounts are even less than the amounts shown in the table. To be exact, the required amounts are based on the actual joint life expectancy of you and your younger spouse.

Another benefit under the new rules occurs when we die. Under those rules, our IRA beneficiaries will generally be able to take withdrawals from our IRA over their life expectancies. The IRS has those life expectancies in another table. If you have inherited an IRA, you’ll need to look into the new rules since you can also rely on them to compute your year 2002 and all future distributions. You can read more about the “IRA beneficiary” rules in another article.

The standard plan instructs you to tap other resources before using your IRA monies. After all, it generally makes sense to shelter your IRA or any other tax-deferred account as long as possible. Remember though, when age 70.5 rolls around, you must start to empty your IRA. If you fail to take the minimum, the Internal Revenue Service stands ready to confiscate 50% of the shortfall. That’s the penalty if you fail to take the minimum. In the past, the IRS didn’t have a way of knowing if you didn’t comply. Now, however, in the years to come, our IRA company will be sending us and our partners at the IRS a notice telling us the exact amount we are required to take.

Uniform Lifetime Table. This table is used for determining the distribution period for IRA distributions during the life of the IRA owner. This table does not apply where the spouse is the sole beneficiary and is more than 10 years younger than the IRA owner. This table may be used for 2002 distributions and is required for 2003 and thereafter.