The Internal Revenue Service's new distribution rules for individual retirement accounts are certainly cause to rejoice. Beneficiary designations can now be changed beyond age 701/2 or after the required beginning date (RBD). Beneficiary choice no longer impacts the size of the account holder's minimum required distribution (MRD). Accounts no longer need emptying after the death of the owner. Whoopee!

Yet amid the hoopla, misconceptions and half-truths about the new regs, which were promulgated by the IRS on January 11, have swirled around the advisory profession. One common fallacy is that a single table now governs all IRA withdrawals. Nah. The IRS' new Uniform Distribution Table is generally applicable only to lifetime distributions. (The only post-death distributions calculated pursuant to the uniform table are those for a spousal rollover, i.e., when a surviving spouse elects to treat the deceased's IRA as his or her own.)

Moreover, during their lifetimes, not all account holders must use the uniform table to calculate the minimum required distribution. When the beneficiary is a spouse who is more than 10 years younger than the IRA owner, the minimum distribution may be based on the joint lives of the spouses (consult the joint-life expectancy table in the IRS' Publication 590) if the spouse was the sole beneficiary on the account for the entire year, says Jonathan Sard, an advisor with Financial Alternatives in Atlanta. In such cases, the MRD will be lower than what you would get by using the uniform table.

Another fantasy is that using the new uniform table always yields a lower minimum distribution than the old rules would have produced. Again, not true. The Uniform Distribution Table is simply the old Minimum Distribution Incidental Benefit Table with a new name. (It needed one.) Therefore, clients who had been using the MDIB table under the old law-those with nonspouse beneficiaries 10 or more years their junior, as well as clients who had selected the joint-life/recalculation method when a spouse 10 or more years younger was the designated beneficiary-will not see reduced distributions under the new rules, according to Rockville Centre, N.Y., CPA Ed Slott.

Perhaps the most misunderstood aspect of the new distribution regulations has to do with beneficiaries. Yes, the regs read "the designated beneficiary is determined as of the end of the year following the year of (the IRA owner's) death" (emphasis added). But that doesn't mean the estate executor, surviving spouse or any other party can willy-nilly add Joe Blow to the beneficiary roster, says Marvin Rotenberg, national director of retirement services at Fleet Private Clients Group in Boston. Nor can anyone change the primary or contingent beneficiaries that had been named by the deceased.

Rather, the IRS' language means it won't look to see who the beneficiary is (which impacts the account's post-death distributions) until December 31 of the year following death, Rotenberg explains. Any beneficiary eliminated prior to that date is disregarded by the IRS.

For example, say a charity is on the account as co-beneficiary with junior. Cashing out the 501(c)(3) nonprofit organization for its piece of the IRA pie (now an IRS-sanctioned act) leaves the child as sole beneficiary. Similarly, when the surviving spouse is the primary beneficiary and the contingent beneficiary is the child, if the wife disclaims by December 31 of the year after death, the child is the account's beneficiary in the IRS' eyes, says Rotenberg.

Under the new rules, designated beneficiaries can take post-death distributions over their own lives, even when advancing to primary-beneficiary status by reason of disclaimer. (Contrast that with a previous regulation, which required using the life expectancy of the person-frequently an older parent-who disclaimed.) The short of it is that contingent beneficiaries, when properly listed on the IRA, now make it easy to shuffle inheritors after the account owner passes away, even if the death was last year.

Disclaimer planning is therefore much more important now, says Robert S. Keebler, a CPA and principal of Virchow, Krause & Co. LLP, a Green Bay, Wis., CPA firm that does financial planning. "The issue that you really need to address is who is the contingent beneficiary," he says.

Consider the post-RBD IRA owner who had, under the old regs, designated a child as beneficiary to take smaller required payouts (even though naming the spouse, so as to leave her assets to live on, might have been preferable). The new rules provide a cleanup strategy, Keebler says.

Change the primary beneficiary to the spouse and make the child the contingent. If the spouse doesn't need the IRA assets after the account owner dies, she can disclaim the account, and the child will get to take withdrawals over his or her life expectancy. The first post-death withdrawal is made by December 31 of the year following the account owner's death. (That's why you can implement this strategy for 2000 deaths. Those beneficiaries must take a 2001 distribution, and the new regs may be used for 2001 distributions.) The beneficiary's initial withdrawal is calculated using his or her life expectancy (based on his or her age) in the year following Dad's death. That initial life expectancy is reduced by 1.0 each subsequent year.

For post-RBD clients with multiple children, make the spouse the primary beneficiary and the kids co-contingents, clearly indicating on the beneficiary-designation form each child's share. After the wife disclaims, split the IRA into separate accounts-each maintained in the decedent's name yet identified as a beneficiary account, e.g., "John Gregory IRA (deceased April 18, 2001). For the Benefit of Max Gregory, Beneficiary"-to let the progeny stretch withdrawals over their individual lives. The account must be split by December 31 of the year after death; otherwise, the oldest beneficiary's life dictates the post-death distributions, as under prior regulations.

From The Crypt

Deaths before 2000 that led to a primary beneficiary disclaiming may also offer planning opportunities, Keebler says. If the original beneficiary was older than the contingent who ultimately inherited the account, the IRA is currently being drained according to the life expectancy of the person who disclaimed (as per the old regs). "But prospectively, we would use the life expectancy of the person receiving under the disclaimer," Keebler reasons.

"So why can't we go back on prior deaths, and if there were disclaimers, use the life expectancy of the younger person?" To find out if you can, make that argument in a request for a private letter ruling from the IRS, Keebler suggests. "That's what you would do."

One aspect of the new regs that could cause confusion for consumers and advisors alike is a new tax-reporting requirement. IRA custodians will have to provide MRD information to (besides the feds) account holders and beneficiaries who are subject to minimum-distribution requirements. The motive behind reporting is simplification-for the IRS. It lets the agency monitor withdrawals to make sure taxpayers take at least the minimum. When they don't, a 50% penalty is assessed.

Although each custodian must furnish minimum-withdrawal information, consumers are permitted to withdraw the aggregate minimum from as few, or as many, of their IRAs as they like, with some caveats. "Only amounts in IRAs that an individual holds as the IRA owner may be aggregated," the regulations read. "Amounts in IRAs that an individual holds as a beneficiary of the same decedent may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent."

Help Wanted

With all the implications of the new rules, advisors may have a hard time deciding whom to help first. Certainly, the ability to change beneficiaries at any age warrants immediate review of ailing clients' designations. Fairfax, Va., advisor Ric Edelman believes seniors who are nearing or beyond 701/2 are the best clients with whom to start, since those who don't need IRA assets to live on can benefit now from lower MRDs. With reduced taxable income, itemized deductions may no longer be subject to phaseout, for example, or perhaps converting to a Roth IRA is suddenly possible.

A population worth seeing soon is your 591/2-year-olds with long-term tax plans. With reduced MRDs, taxable income down the road probably will come in lower than what you projected under the old regs, says Tucson, Ariz., advisor Patricia Raskob, who begins forecasting clients' post-RBD tax brackets when they hit the penalty-free withdrawal age of

591/2. "I have a few clients who are currently in the 15% or 28% bracket with $10,000 to 15,000 worth of room within the bracket, and we have done early withdrawals [reducing account corpus] in order to keep the required withdrawals from kicking them up into a higher bracket after 701/2," says the president of Raskob Kambourian Financial Advisors Ltd. Lower MRDs could obviate the need for this strategy.

Although there's nothing advisors can do to have the benefit take effect immediately, post-RBD clients with IRAs at institutions that didn't offer all payout options (and got stuck with a poor one) may be able to get a fresh start. "In the past, a lot of custodians didn't allow the life-expectancy option if the beneficiary wasn't a spouse, but now they're going to be forced to," says Diane Compardo of the St. Louis advisory firm Moneta Group. When your client's laggard institution gets up to speed, that's your chance to plan anew.

Clearly the new regs ring in many glorious changes worth celebrating. But not everything under the sun is new. The law still doesn't shine favorably upon the heirs of those who die young without proper planning. As under the old rules, when an IRA owner dies pre-RBD with no designated beneficiary, whoever ultimately inherits the account must empty it by the end of the fifth year after the year of death.