In a constantly changing financial environment, it is important to stay up-to-date on modifications that may affect your retirement plan. Raymond James financial advisors are dedicated to providing you with the expertise and personal service you need to make the right decisions as the economy and your personal circumstances change. This brochure complements our knowledge, and should prove useful as we guide you to making important decisions regarding required minimum distributions from your retirement account.

Background on RMD Regulations

A Required Minimum Distribution (RMD) is the annual amount participants must withdraw from their retirement accounts, qualified plans and IRA accounts. Participants must begin to receive distributions in the year in which they turn 70½.

Under the previous rules, the RMD was calculated by dividing the previous year-end balance by the applicable life expectancy, determined by the participant’s age, the measuring beneficiary and the method of distribution elected. The RMD could be calculated using various software applications, which made the calculation appear simple, but very few people understood the negative impact created by certain beneficiary designations and/or distribution methods chosen. While participants could change their named beneficiary, the distribution formula was firm in determining the RMD.

^* Roth IRAs are exempt from RMD rules during the lifetime of the participant.

Over time, with account balances steadily increasing, what was once a trivial issue became a major economic event for participants and beneficiaries alike. Many participants were left wondering if they were going to outlive their IRA accounts. Beneficiaries were equally confused because they were receiving their shares of an IRA account in one lump sum distribution the year after their loved one passed away.

In recent years, there has been much discussion surrounding RMDs, specifically the ability to stretch out an IRA. In short, a stretched-out IRA involves designating younger beneficiaries, such as grandchildren, and calculating the RMD based upon the life expectancy of these very young beneficiaries.

However, when multiple beneficiaries were named to a single IRA, the distribution still had to be based on the oldest beneficiary.

Over the last few years, there have been attempts by Congress to simplify the rules; however, none of the bills passed.

In response to these events, the IRS released regulations that became effective for plan participants and beneficiaries in 2002, significantly simplifying the RMD rules for retirement accounts.

Highlights

• There is no life expectancy method to elect.
• One uniform lifetime table is used during the participant’s lifetime. Consult us about which table applies to you.
• New life expectancy tables have been introduced to reflect longer life expectancies of individuals.
• Upon death of the participant, if the beneficiary is the spouse, he or she may roll over the remaining balance, treat the account as his or her own or continue taking RMDs out of the participant’s account based upon the spouse’s life expectancy.
• The beneficiary will be determined as of September 30 following the year of the participant’s death. This change will allow for some beneficiaries to disclaim or refuse their share, or completely cash out, thus allowing the RMD to be calculated based upon the oldest remaining beneficiary, unless the account is segregated.
• If the account is segregated into separate accounts by December 31 of the year following the death of the participant, each beneficiary may calculate RMDs based upon his or her own life expectancy.

Effects of the Rules

Because of the way the rules were written, they have the potential to benefit everyone who owns a retirement plan. While they affect all plans, the rules are extremely beneficial to IRA owners who generally have more control over their accounts and planning decisions. Participants in qualified retirement plans such as 401(k)s are still restricted by language in the plan document adopted by the employer.

The rules may be most beneficial to participants who have made poor planning decisions in the past. For example, the death of a beneficiary previously had an adverse effect on the participant’s RMD calculation. Under the new rules, the participant can name a new beneficiary and calculate RMDs based on the uniform lifetime table. This could result in a substantial difference in the amount of the RMD and ultimately increase tax savings through ongoing tax deferrals.

In light of these changes, everyone should consider re-evaluating beneficiary designations and planning strategies. For IRA owners, the rules allow each beneficiary to calculate the distributions based upon his or her own life expectancy, even if one of the beneficiaries is an entity, as long as the account is segregated the year after the participant’s death.

With this in mind, the need to have separate IRA accounts for several beneficiaries is greatly reduced. IRA account holders with multiple accounts may want to consider aggregating these IRA accounts to simplify their estate planning. Furthermore, those who are charitably inclined may want to consider adding a charity as a partial beneficiary. When planning to leave assets to a charity, it is a good idea to consider assets that would otherwise be taxable.

Consider Bill’s Situation

• 80-year-old retiree
• $250,000 IRA balance
• Wife is named designated beneficiary
• 45-year-old daughter is named contingent beneficiary
  Under previous regulations – $26,316 RMD
  Under updated regulations – $13,369 RMD

When Bill turned 70½, both he and his wife were in excellent health and he didn’t need to access his IRA to supplement their retirement income. Bill decided to elect to recalculate both his wife’s and his life expectancies to determine his RMD. This election allowed him to receive the lowest amount each year while they were both alive.

However, when Bill was 75, his wife passed away. When reviewing his estate plan with his financial advisor, he found that from that time forward, his RMD would be based upon his remaining single life expectancy. This change greatly increased his RMD amount each year.

In addition, he knew that upon his death the entire account would be distributed to his daughter by the end of the following year.

Bill and his financial advisor reassess his estate plan. Under the rules now in effect, his RMD will be calculated based upon a new uniform table. He finds that, according to the updated life expectancy table, his life expectancy for the year is now 18.7 years. Bill’s RMD will now be ¹/18.7 of his account or $13,369, which is less than he would have been required to take under the previous rules.

Furthermore, even if he died this year, the account would not close next year. In fact, his daughter would calculate RMDs based upon her life expectancy, which would be 37.9 years next year under the updated life expectancy table. In other words, his daughter would be able to distribute his remaining IRA over the next 38 years.

Uniform Lifetime Tables

To calculate your RMD, find your age and the corresponding applicable divisor. Then divide the prior year-end balance of your IRA account by the divisor. The resulting number is the dollar figure you will need to remove from your IRA to meet your RMD for the current year.

For example, if you are now 82, your applicable divisor is 17.1. If the balance in your IRA as of December 31 of last year was $235,000, divide that amount by 17.1. The result is $13,742.69. This is the amount of your RMD for the current year.