As the Bush administration took office in January with a pledge to cut income taxes and repeal the estate tax, financial advisors and their clients had reason to expect changes. What they didn't expect, however, were massive changes in distribution rules covering IRAs, 401(k)s and other taxfavored retirement plans.

But that's exactly what happened on January 11, in the waning days of the Clinton administration.

After more than a dozen years of debate over distribution rules that were widely regarded as outdated, overly complex and in some cases costly to retirement plan holders and their beneficiaries, the Treasury Department issued proposed rules that dramatically simplify and streamline distribution planning. The rules also provided new options expected to save taxpayers billions of dollars.

Although the rules do not officially go into effect until January 2002, the impact was immediate because the department said they could be used for calculating distributions in 2001. "We now have to go back to the drawing board for all our clients, particularly those who are taking distributions," says Eleanore K. Szymanski, a principal of EKS Associates in Princeton, N.J.

Clients often weren't clear on the rules to begin with, she says, which means advisors will have to go back to basics. "We have to now unlearn, unteach the client and give them new rules," she says.

Under the rules, the process of planning IRA distributions for clients will no longer involve a quagmire of distribution tables. Everyone will instead use one uniform table.

This change alone, advisors say, will radically simplify the process of planning IRA distributions. In many cases, they say, IRA custodians will calculate the distributions automatically.

"Before, we were putting together strategies that were more complicated than we could possibly communicate to the client," says John Henry McDonald, president of Austin Management Co. in Austin, Texas. "Now they're understandable, they make sense. You can put your arms around it and tell people, 'Here's the deal.'"

The new rules should also simplify communications between financial advisors and the banks or brokerage houses that act as custodians of their clients' IRA accounts, says Richard Krentz, president of R.D.K. Financial Group in Valley Cottage, N.Y. Foul-ups on distributions were not uncommon under the old tables, he says.

"To say communications could get messy is an understatement," Krentz says.

Beneficiaries will no longer be locked into distribution schedules after the death of an IRA holder. The new rules allow distributions to be changed according to the life expectancy of the beneficiary, instead of the original IRA holder.

This, financial advisors say, could lead to tremendous savings for beneficiaries, such as an IRA holder's children, who under the old rules often had to withdraw all IRA funds by the year following the IRA holder's death.

The new rules also allow beneficiaries to be designated as late as the end of the year following the year of the IRA holder's death. Under the old rules, clients had to select beneficiaries before reaching their required beginning date, at age 70 1/2. There's also an excellent chance that clients who have reached the age of 70 1/2 years old and are currently taking IRA distributions under the old rules will see a reduction in their minimum distribution requirements.

In most cases, that reduction should be 20% or more, says Robert S. Keebler, principal with Virchow, Krause & Co. LLP, an accounting firm in Madison, Wis. It will mark the first time advisors can do meaningful IRA planning after a client reaches the required beginning date, he says.

"Before the rule changes, (clients) were absolutely stuck," Keebler explains. "Now, with respect to clients over the age of 70 1/2, they in essence have a fresh start."

The bottom line, advisors say: Clients and their beneficiaries will have the option of taking smaller annual distributions, paying less in taxes and lengthening the lives of their IRA funds.

But simpler doesn't mean easier. Financial advisors should immediately begin reviewing the IRA distribution tables for their clients, particularly those who have just started taking payments, says Thomas Gau, principal with Oregon Pacific Financial Advisors in Ashland, Ore. "For clients over the age of 70, advisors should revisit these tables immediately because they are going to have a substantial impact on their 2001 distribution," Gau says.

One additional benefit is that the new rules should also lessen the impact for clients who suffered a decline in their IRA accounts in 2000, he says. For a client over the age of 70 1/2 who chose the single-life option under the old system, the new rules could lower annual distributions by up to 39%, he says.

"That is what is going to get people very interested," Gau says. "It is not just the required minimum distribution. It's the issue of the ripple effect. How does that affect you in the long run?"

Aside from the immediate beneficial impact on clients, the new rules create an assortment of post-mortem planning opportunities that didn't exist under the old rules, Keebler says. As an example, he explains, say a 76-year-old client names his children as IRA beneficiaries after the death of his wife. Then the client himself dies. Under the old rules, the children probably would have been required to take distributions equal to all of the IRA account balance by December 31 of the year following their father's death. Under the new rules, however, the distributions can be stretched out over the children's life expectancies.

In another example, a client names as IRA beneficiaries a daughter and the Red Cross in a 50-50 split. Under the old rules, an immediate distribution to the charity would have forced a quick distribution-and tax hit-on the daughter. Under the new rules, Keebler says, the IRA can be divided into separate accounts, with the daughter spreading out distributions over her life expectancy. "It's an absolute huge difference," he says.

These options for post-mortem planning are one reason advisors shouldn't believe these new rules will minimize, or simplify, the IRA-planning part of their businesses, Keebler says.

"The universe of people has exploded," he says of the IRA-planning field. "Up to now, we've been able to work with people aged 60 to 70 ... Now you're able to work with people from 60 until death."

Szymanski agrees. "The issues surrounding the distributions are still estate-planning issues, which are very complex," she says.

There could be opportunities to revisit the distribution tables for beneficiaries of clients who died before 2000, Keebler says.

In cases in which a client dies before reaching the required beginning date, the new rules also allow beneficiaries to stretch out distributions. Under the old rules, a designated beneficiary had to take distributions equal to the entire IRA account within five years. The new rules allow the distributions to be based on the beneficiary's life expectancy.

The new rules also create some wrinkles advisors need to be aware of, he says.

Clients who turned 70 1/2 in 2000 and decided to postpone their distributions until early 2001 will still be obligated to follow the old rules. In this case, the new rules would take effect for the next annual distribution, he says.

Advisors also need to make sure that adjustments are made for clients who make quarterly estimated tax payments, Gau says. That's because tax preparers will base estimated tax payments on the previous year's tax liability, he says.