Tapping your IRA
"Under the old system, you had to make huge, irrevocable decisions -- now all you have to do is take out the minimum distribution," says Natalie Choate, Of Counsel with Bingham McCutchen LLP in Boston and author of "Life and Death Planning for Retirement Benefits." And since the account custodian files reports to the IRS each year, "you no longer have to hire a special expert for that process."
Still, even though the rules are easier to understand, this is no time to go it alone. "Now I hope the focus will shift to what is the best way to invest to make the account last and who should be the beneficiary," says Choate, who recommends meeting with a financial expert to create an estate plan.
Sit down with a financial planner or estate planner and look at how much money you have in your account, how long you and your spouse expect to live, special needs your family might have -- and, based on that, how much money you can comfortably afford to take out each year.
If you have an IRA, no matter how old you are, you need to name a beneficiary. The beneficiary is the person who will inherit your IRA when you die. While account holders can change beneficiaries whenever they want, most experts agree that it usually makes the most sense to name a spouse as beneficiary.
"If you're married and your spouse relies on your IRA income, that's the person you want to name -- and most people go this route, says Twila Slesnick, a Dublin, Calif., tax accountant and co-author of "IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out."
If the spouse happens to be more than 10 years younger, the IRS will allow you to use a joint life expectancy table. End result? Since one of you is expected to live at least 10 years longer -- smaller required withdrawals.
If you die after you start taking your distributions, your beneficiary will receive the disbursements over their expected lifespan according to the IRS table. If you have several beneficiaries, the IRS will use the age of the oldest one. If you die before you start taking distributions, and have named your spouse as your beneficiary -- the spouse can roll your account into his or her own IRA, empty the account within five years, or take disbursements over his or her entire lifetime. Most spouses choose to roll the money into their own IRA. If your beneficiary is not a spouse, that person has two choices: take the money over five years or over his or her lifetime.
If you die without a beneficiary before beginning regular distributions, the account will pass to your estate -- and must be emptied within five years, says Picker. If you die without a beneficiary after you begin taking distributions, then the account will be paid out through your estate over what would have been your lifespan according to the IRS table.
Some experts believe that IRS regulations now give executors some latitude in passing IRA accounts on to the heirs of an estate, even if the account holder died without naming a beneficiary for the IRA itself. Others disagree.
The best advice? Make things easier for your heirs and name a beneficiary. And if your IRA is the only money in your estate, leave enough in life insurance to cover estate taxes, says Picker. That way, your heirs don't have to dip into the IRA to pay estate taxes then turn around and burn up additional IRA money to cover taxes on what they had to withdraw.
Last, but not least, don't forget to put a little of your disbursement income away for a rainy day. Just because you've tapped your IRA doesn't mean the days of squirreling away money are over, says Ed Slott, a New York-based CPA and author of "Ed Slott's IRA Advisor," a monthly newsletter. "Even though you are retired," says Slott, "keep saving."
|-- Updated: March 28, 2008