Tax-defferal in IRA

Current tax rules for traditional IRAs (Individual Retirement Accounts) have minimum distribution requirements that begin by April 1 of the year after you reach age 70 (although employer-sponsored qualified plan distributions can be postponed until retirement if you continue working past age 70). The minimum required distribution is the balance of the account as of the previous December 31 divided by an appropriate life expectancy factor. If you fail to take required withdrawals, there is a 50 percent tax penalty on the shortfall.

The first required distribution is actually for the year in which you attain age 70; the IRS merely lets you postpone it until April 1 of the following year. If you postpone the first distribution, a second distribution is due by December 31 of the current year, substantially increasing your taxable income for that year.

The IRS uses life expectancy figures to determine the required minimum distributions (RMDs) that IRA holders aged 70 and older must receive. Population trends indicate that people are living longer and, thus, may need income for an extended period of time. In response, the IRS has increased life expectancy figures, decreasing the mandatory withdrawal amounts. These reduced requirements may allow people to keep their savings tax-sheltered for a longer period of time.

Most people can calculate their minimum distributions based on one uniform table that includes the joint life expectancy of the taxpayer and a hypothetical beneficiary who is ten years younger, even if no beneficiary is named. If the designated beneficiary is a spouse who is more than ten years younger than the owner, a separate, generally more favorable table (joint life and last survivor expectancy) is used. For people with more than one IRA, the minimum distributions must be calculated separately for each IRA because different multiples (i.e., life expectancies) may apply to each IRA. The sum of the separate minimum distributions is the total IRA amount that must be withdrawn for the year; this amount can be taken out of any one or more IRA accounts.

To calculate the amount of a required distribution, divide the IRA balance (as of December 31 of the previous year) by the applicable distribution period. For each subsequent year, the required minimum distribution must be recalculated.

The recent legislative changes also make it easier for IRA holders to change beneficiaries; those who have begun receiving payouts may postpone designating one or more beneficiaries or change beneficiaries. Furthermore, primary beneficiaries may refuse or "disclaim" the account, allowing it to pass to a contingent beneficiary, who can then receive distributions based on his or her life expectancy. The lower tax liability on the smaller distribution and the continuation of tax-deferred growth also pass on to the named contingent beneficiary. This change can be useful to, for example, couples who want to make IRA assets available to surviving spouses, but allow them to disclaim the amounts and pass them on to children or grandchildren.