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Two decisions you have to make about your
retirement plan by age 70ý can make a huge difference in your final balance, taxation and
plan portability: naming a beneficiary and choosing a method for calculating required
minimum distributions. Unfortunately, the majority of errors are discovered after it
is too late to set things right.
Feeling generous, Congress is proposing to give Americans
with tax-qualified plans, like IRAs,
401(k)s, 403(b)s and 457s, a chance to fix outdated, unintended or unwanted beneficiary
designations or calculation methods.
The proposed law, currently before the Senate, would allow
for a one-year grace period to make any beneficiary or distribution calculation
corrections, even for those older than 70ý. This window of opportunity would be created
because Congress is ordering the U.S. Treasury Department to formalize, by Dec. 31, 2001,
tax-deferred account handling rules the IRS proposed 13 years ago.
"Potentially, there are millions of people involved
with this," said tax attorney Seymour Goldberg, of Garden City, N.Y. The biggest
impact will be felt by those with tax-deferred retirement-account balances greater than
$100,000, he added.
Further, Congress proposes giving heirs a chance to change
mistakes made by their benefactors. One of the common ways many heirs lose a large portion
of IRA money willed to them is that their benefactors chose a distribution calculation
method which forces the beneficiary, upon death of the account holder, into withdrawing
the account balance quickly. This window will allow heirs to recalculate distributions
using a method they choose, rather than the one selected by the original plan owner.
For instance, the heir of a person who chose at age 70ý to
take all their IRA money by age 85 might be stuck using that life expectancy if the plan
holder died at age 73. That would force the heir to take all the money within 12 years or
less. The proposed law may allow the heirs to recalculate IRA distributions based on their
own life expectancy.
Under certain distribution methods, in use today, heirs can
lose up to 80 percent of an account's value to both income and estate taxes. The only
hitch is that the original plan owner must have named the beneficiary.
For those who didn't name a beneficiary, the law would
allow heirs to take the money over five years, rather than one year, as is currently
stipulated.
"The window period to make correction ... it's a great
service to the public," said John Wimbiscus, principal with Trinity Financial
Advisors L.L.C. in Chicago.
With an election this year, it's unclear whether the White
House will sign this bill into law or veto it, Capitol Hill watchers say.
Currently, complicated sets of rules govern the method by
which money is distributed from tax-qualified plans such as IRAs, 401(k)s and 403(b)s. The
IRS requires Americans to choose the beneficiaries and distribution calculation method by
the time they reach age 70ý. Whatever the beneficiary form says at that time is the way
it goes, forever.
Make the wrong decision at age 70ý and you might find
yourself forced to take a larger withdrawal from your account than you want to, resulting
in a big tax bill. And, your estate might be smaller than expected for your heirs. For
many folks, the last time they looked at a beneficiary form was the day they signed up for
their account.
Additionally, the law proposes reducing the excise tax for
failure to take a required minimum distribution to 10 percent, from 50 percent, of the
amount that should have been taken out.
The downside of these proposed laws? A one-year window may
not give financial planners and account custodians enough time to make changes for
everyone.
"I think there will be a lot of overtime (worked by
financial planners and tax attorneys) if this passes," Wimbiscus said.
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