The new IRS rules governing minimum required withdrawals from individual retirement accounts and amended qualified retirement plans not only greatly benefit account owners reaching age 70 1/2, they will help beneficiaries of those accounts. The rules make it easier to "stretch out" required IRA withdrawals for beneficiaries after the death of the original IRA owner, as well as provide more flexibility in selecting beneficiaries. Even for heirs of IRAs whose owner died in 2000, there is still time to make important changes.

For example, failing to name a beneficiary for an IRA or qualified retirement account such as a 401(k) means that the estate becomes the beneficiary at the owner's death. Under the old rules, the estate then had to be liquidated by the end of the year after the year the owner died. Thus, the retirement accounts got hit with an immediate and often large tax bill, and the estate's beneficiary or beneficiaries lost the opportunity to stretch the retirement distributions out over their lifetime. Under the new rules, however, beneficiaries who inherit an IRA from someone who has already started minimum required distributions without designating a legal beneficiary can now stretch the post-death distributions out over what would have been the remaining single-life expectancy of the account owner.

Despite this change for the better, it remains critically important to name both a primary beneficiary and a contingent beneficiary rather than leave these accounts to the estate. For one thing, should the owner die before required distributions begin, the old rules still apply: the entire account must be liquidated by the end of the fifth year following the year the owner died.

Second, you can now change beneficiaries up to the time of your death without potentially increasing the minimum amount of your lifetime distributions. That wasn't the case before. Furthermore, regardless of when you name a beneficiary, up to your death, they generally will be able to stretch distributions out based on their single-life expectancy provided in the IRS tables.

Now for the real flexibility under the new rules that comes from naming beneficiaries. Understand that new beneficiaries cannot be added after the owner dies. However, final determination of who will be the ultimate beneficiary or beneficiaries among the already named beneficiaries does not have to be made until December 31 of the year following the year of the IRA owner's death. Thus, the beneficiaries who inherited accounts from owners who died in 2000 still have time to make changes this year.

For example, a surviving spouse is named as the primary beneficiary of an IRA and a child is named as contingent beneficiary. The surviving spouse might choose to "cash out" all or a percentage of their share of the IRA, or they could "disclaim" their interest in the inherited IRA. When disclaimed by the primary beneficiary, the IRA will pass to the next legally named beneficiary, which in this case is the child. In either case, the child, as sole beneficiary, can now stretch out the IRA distributions over his or her lifetime.

Also under the old rules, when the primary beneficiary died before the owner died, the contingent beneficiary eventually inheriting the IRA had to liquidate the account by the end of the year following the year of the owner's death. Now the contingent beneficiary can stretch it out over his or her own lifetime.

There's also more flexibility for multiple beneficiaries. If more than one beneficiary inherits an IRA, distributions are based on the life of the oldest beneficiary. So the strategy is to separate the IRA into different IRAs and then each beneficiary can use his or her own life expectancy. Under the old rules, separation had to be done before the owner died. Now it can be done as late as December 31 of the year following the owner's death.

Problems also can occur when one beneficiary is a charity and the other is a named individual. In this situation, the named individual cannot use his or her own life expectancy. Under the new rules, however, distributing the charity's share from the IRA before the end of the year following the year of death allows the named individual to stretch out the remaining assets over his or her lifetime. Again, if there are multiple named individuals, they might break it into separate IRAs as suggested earlier.

 This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Nigel B. Taylor, CFP, Santa Monica, California. If you have any questions or concerns regarding this, or any other financial topic and are a resident of Southern California, please call me at 1-800-444-2237 (California residents only please), or click on the "MORE INFO" button to arrange for a free initial consultation in the comfort of your home or office.