Torch, Spring 2001

The Treasury Department recently issued new rules reducing the minimum IRA distribution beginning at age 70 1/2. The change also eliminates the penalty for naming a charity as beneficiary or co-beneficiary of your retirement account. J oe enjoyed coaching basketball for more than 35 years. He had always trusted the Lord to provide for his needs, and he strived to be a good steward of his financial resources. He faithfully paid his bills, supported his church, provided for his children’s education, and planned for his eventual retirement. In the early 1980s, Joe started contributing to an IRA, which grew significantly. Considering his pension, social security benefits, and other investments, Joe was pleased to find that he could retain his comfortable lifestyle without needing distributions from his IRA. Therefore, when he retired at age 63, he decided to defer distributions from his IRA, allowing the fund to grow until he needed the extra income. Approaching age 70, Joe was enjoying a comfortable retirement. One day, he received a call from Mark, his CPA. Mark informed Joe that although Joe did not need the extra income, the IRS would require him to start taking IRA distributions at age 70 1/2. Furthermore, Mark was concerned that the unwanted income would place Joe in a higher income tax bracket. They scheduled a meeting to discuss his options. Fortunately, since their conversation, the IRS announced new, simpler rules governing the required distributions from IRAs, 401(k), TIAA-CREF, pension, and other such tax- deferred retirement plans effective for the 2001 year. Prior to the rule changes, the IRS expected Joe to exhaust his IRA before he passed away. Mark calculated Joe’s minimum distributions based on his life expectancy, according to approved IRS tables. The IRS has updated these tables and now assumes a longer life expectancy for individuals. Mark recalculated Joe’s required minimum distributions according to the new tables and found that they will be significantly less, allowing him to remain in the same income tax bracket. He will also maintain greater assets in his IRA, allowing for greater future growth. Mark advised Joe that these new regulations may also enhance his estate plans. Joe plans to pass the majority of his estate to his family. He also desires to establish an athletic scholarship at Cedarville University, his son’s alma mater. Knowing that his family may be subjected to double taxation (income taxes and estate taxes) if he named them as beneficiary of the IRA, Joe asked whether he could name Cedarville University as co-beneficiary of the IRA. Previously, Mark would have hesitated to pursue this option because it would have increased Joe’s required minimum distributions. However, the new rules allow Joe to name Cedarville as beneficiary or co-beneficiary of his IRA without penalty. Mark recommends this option because it will accomplish Joe’s goal of establishing a scholarship at Cedarville and will help his family avoid unnecessary taxes. Treasury Issues New Rules for Minimum IRA Distributions Dave Bartlett Director of Gift Planning For more information about how you may enhance your estate plans through Cedarville University, contact the office of gift planning at 1-800-766-1115 or e-mail Dave Bartlett at bartletd@cedarville.edu . Spring 2001 / TORCH 7