Simplified retirement-plan rules add options

BOULDER — The Internal Revenue Service (IRS) has simplified important rules involving 401(k), 403(b) and 457 retirement plans.

“The changes are mainly about how the funds are distributed,´ said IRS representative Rudy Bolodreghini. “It’s ever so much easier for (retirement-plan) owners and businesses to do the paperwork and to know how the plans work.”

John Truhlar, owner of Truhlar Financial Strategies in Boulder, offered some background on the retirement plans.

“After a person retired at 70 and a half, you had to make an election as to how the proceeds were distributed,” he said. “Once you decided, that was final. You had to keep that decision forever.”

Now, retirees can change the designation if they desire.

Published on January 18, regulations 130477-00 and 130481-00, “Required Distributions From Retirement Plans,” is retroactively effective as of January 1, 2001. Plan-holders and facilitators are permitted, although not required, to use the new rules. They will officially take effect January 1, 2002.

How does the change help retirees?

While a person is still working, paycheck deductions applied toward retirement funds are not taxed. This helps the fund grow faster. The government requires that upon turning age 70 and a half, the retiree must withdraw a certain percentage from a retirement plan per year. Any funds withdrawn may be taxed.

“Of course you can take it out faster,” Truhlar said. “That will make the government really happy.”

The amount retirees are required to withdraw depends upon the beneficiary election they select.

“The attorneys in D.C. loosened up the beneficiary requirements,” Bolodreghini said. “They went down to two tables from four or five.”

The tables determine the minimum required withdrawal per year based on the holder’s and beneficiary’s age.

“You could take it out over single life, which means yourself, or joint life, your spouse,” Truhlar said.

Before the rule change, retirees had to plan very carefully to make sure they would not get stuck with an election plan they didn’t want. The new rules allow retirees to change their election choices to reflect changes in their life.

“Before the change, once you elected a beneficiary and started taking mandatory distribution, you couldn’t change the beneficiary designation,´ said Douglas Jones, manager of Investment One, the investment department of First National Bank of Colorado.

Now retirees can rest assured that they and their spouses will not have to withdraw more funds than they want to.

“It’s really a freebee,” Truhlar said. “There’s no penalty. People have more options available when the time comes.”

Jones advises his clients to make changes based on how they want to use their retirement funds.

“You have to look at changes from a needs basis,” he said. “Do you need these funds to live on and spend, or can you pass these funds on to other generations?”

Jones views the rule change as a means of weaning the working public off Social Security.

“Most (retired) people aren’t supported by Social Security,” he said. “These changes have taken place to encourage people to save in retirement plans. Pensions, Social Security, the sale of a business and retirement dollars are all a part.”

By leaving as much as they can in their retirement plans, retirees can see their funds grow dramatically because taxes are not depleting them, Jones said.

“Those tax-deferred earnings can be a powerful tool,” Jones said. “You can compound those earnings.”

“When a person dies and the beneficiary of the IRA gets the money, that income is still taxable,” Truhlar said. “But they can elect to take out the income over their lifetime as opposed to taking a lump sum.”

This would be important if the beneficiary needs the funds for living expenses.

“By taking out less, the plan will last longer,´ said Bolodreghini.

Although the changes were designed to simplify retirement plan taxation, Jones encourages retirees to seek help when making changes in their beneficiary election.

“They need to sit down with someone who has the ability and skill to understand the big picture,” he said. “It is a case of understanding the client’s total income needs and desires of what they want to do.”

For more information on the new tax laws, visit ftp.fedworld.gov/pub/irs-regs/13048100.pdf or call (800) 829-1040.

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