On 1/11/2001 the IRS issued proposed regulations that are retroactive to 1/1/2001, greatly simplifying IRA distributions rules. The change is being publicized that it will save taxpayers billions of dollars, and at the same time assist the IRS in collecting billions of dollars in uncollected taxes that is said to have slipped through the cracks of the old tax system.

Previous to this change there were several complicated methods to calculate a taxpayers life expectancy that is used in the calculation of a taxpayers IRA minimum distribution. The new rules create one single, simple, uniform method of calculating a taxpayer's life expectancy that effectively lengthens, for tax and distribution purposes, how long a person is expected to live and how much the distribution will be. This means taxpayers who reach the mandatory distribution age of 70 and a half will be able to withdraw less money and pay fewer taxes than what was previously required by the tax law. More money will be left in the taxpayer's tax-deferred account earning additional interest. Taxpayers should be aware that if they do not take the mandatory minimum withdrawal, they would be subject to a 50 percent penalty. There is no minimum distribution required from a Roth IRA.
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Savings Incentive Match Plan for Employees
Plans can be set up by employers that have 100 or fewer employees who earned at least $5,000 in compensation for the preceding calendar year.

IRA
Individual Retirement Plans are personalized savings plan for individuals.

Keough Plans
Keogh Plans are usually adopted by self-employed individuals. One of the advantages are special tax treatment that may apply to Keogh plan lump-sum distributions.

Simplified Employee Pensions
Employers can make contributions to a retirement plan for their employees, instead of establishing a profit sharing or money purchase plan with a trust.

You should have an IRA Check-Up at least once per year. Some of the check-up procedures you can do yourself, but for certain steps you probably will want the help of a trusted financial advisor like your CPA or financial planner.

When I do check-ups I nearly always find things that need improving, primarily because of changes in tax rules, the financial markets, and the client’s own financial situation, needs or goals.

Volumes have been written on the IRA rules guidelines and the hundreds of thousands of nuances. But here are 10 steps in for a Check-Up covering many of what I think are the often overlooked or underpublicized strategies.

1. Check your beneficiaries
Determine that your designations of beneficiaries
(a) are in accordance with your estate plans and that the right people are getting the right portions

(b) make best use of a prolonged withdrawal thus getting maximum tax-deferral, by naming younger beneficiaries and

(c) consider the estate tax implications. Money left directly to grandchildren can often save a large amount of estate taxes in your children’s estates when your children die.

2. Contribute where possible and pick the right IRA Tax-deferred compounding usually makes sense.
In the case of Roth IRAs, the compounding is tax-free and even better. You might be allowed to contribute money into an IRA but have overlooked doing so. You may have become disqualified years ago because of being a participant in a retirement plan but perhaps now you can contribute because of changed rules (e.g. if adjusted gross income for a married couple filing jointly is under $160,000). Non-working spouses can contribute $2,000 to a spousal IRA. Nondeductible IRAs do not have an income limitation for qualification, and the growth is tax-deferred. Roth IRAs also have a $160,000 limit if you are or your spouse are covered by a retirement plan.

a. Roth IRAs are not deductible but the withdrawals are tax-free. If you expect your marginal tax bracket to rise when you withdraw the funds, then choose the Roth IRA. Also, Roth IRAs do not have any mandatory distribution requirements, and thus they can grow faster than a regular IRA, and might help avoid taxable Social Security benefits and minimize the loss of other tax benefits and credits which are based on AGI. Importantly, Roth IRAs allow you to compound your money on a completely tax-free basis. A regular IRA gives you a tax deduction, but the tax savings usually cannot grow as fast as money within a Roth IRA which is tax-free. Here’s a simple example comparing the 2 IRAs. With a regular IRA, you contribute $2,000 which doubles, say, in 7 years to $4,000 and then you withdraw it paying 30% taxes to net $2,800. Add to the $2,800, the after-tax $840 earned on the initial tax savings of $600 ($600 doubles to $1,200 less 30% taxes equals $840) and the total value is $3,640. However, for the Roth IRA, the $2,000 contribution doubles in 7 years to $4,000 and there are no taxes, thus an advantage of $360. Finally, Roth IRAs could save income taxes over traditional IRAs when income taxes are levied on income in respect of decedent when the owner dies, and these savings could be more than the build-up value of the initial tax-savings from the Traditional IRA.

b. Even though you or your spouse are active participants, if you have a sideline business (e.g. marketing, consulting, etc.), you should consider a SIMPLE IRA whereby you can contribute the lesser of $6,000, as or net business income. There is a modest cost in covering employees (e.g. based on 2%, or 3% in another case, of their compensation.) If you had a low net income , then the SIMPLE IRA could be a smarter choice over a SEP IRA for which the contribution is roughly 13% of net income.

c. Children can open their own Roth IRAs and Traditional IRAs as long as they have earned income.

d. Education IRAs are limited to $500 per year per beneficiary and in my opinion not worth dealing with.

3. “Independence and Resolution Account”
The original objectives of IRAs were for retirement but they can be used to help you be more independent and to resolve some pressing problems. I’ve seen too many people living too frugally because they would not spend more than their arbitrary minimum distribution amount. For example, many seniors doe not have sufficient coverage via a solid long-term care policy because of tight cash flow making premiums not affordable, yet they have plenty of IRA funds for future needs. The senior should withdraw the funds from the IRA to cover the premium and the related income taxes, and not be chagrined about it. After all, the expenditure is very valid and in their longer-term interest. Also, if you have built a good IRA nest egg but find at 65 that you do not want to retire for another 10 years but instead you want to start a small business, I suggest that you consider the IRA funds as a way for you to be independent, and a good investment in yourself. Also, IRAs can be great sources of money needed to pay for children’s education costs, even after figuring the tax bite.

4. Convert Traditional IRAs to Roth IRAs
The conversion to a Roth IRA is permitted if your modified adjusted gross income is under $100,000. Perhaps if you are in your own business you might be able to squeeze income below that amount in order to qualify.

Remember that you paying taxes now might be better than you or your beneficiaries paying taxes later if tax rates then are higher.

5. Select the right distribution method when you turn 70 1/2
The recalculation method results in a slower distribution, thus saving taxes. However, that method can be a real loser if your estate is the beneficiary (e.g. your spouse dies first) because the balance must be distributed in the year following death, whereas if the term-certain method (or the hybrid method) is used the distributions could be prolonged over the remaining years of the decedent’s original life expectancy. Get professional help running scenarios.

6. Reevaluate the investment mix and the particular investments
Some people have scores if not hundreds of thousands of dollars in their IRAs. Getting professional guidance on investments is essential.

a. Bonds - When reviewing your investment allocation among asset classes, consider having more bonds in IRAs than outside of IRAs when income is subject to ordinary tax rates. Thus, if 25% of your total assets are in bond-type investments, but they are in your regular accounts, you might consider selling and repurchasing them in your IRA. Choose the high-basis bonds to limit taxable gains and perhaps even generate tax losses.

b. Stocks and equity mutual funds - If you are under 50 and have at least 10 years before you expect to tap your IRA, you might consider higher-growth mutual funds and stocks for the equity portion of assets to augment the equities in your total portfolio. Mutual funds which are not tax-efficient and generate high income and capital gains distributions are okay within an IRA because of the tax-deferral. Also, within an IRA you can more frequently change your investments (e.g. automatic rebalancing) without fearing the tax impact. Consider replacing some of the managed mutual funds with indexed funds to reduce management risk. Also, think about locking in your growth as of now by selling your equity funds and replacing with a equity mutual fund or unit trust that offers protection of principal.

c. CDs - Often, people have low-interest short-term CDs in their IRAs spread around at several banks. They should seek out higher yielding CDs, perhaps of a longer-term or alternative investments. Often, you can break CDs in IRAs without a bank penalty, if you ask.

d. Annuities - It usually does not make sense to have a variable or a fixed-rate annuity within an IRA. If you do and your surrender penalty period is over, then look into transferring the value to an investment in the IRA which has a better yield and lower fees.

7. Simplify your life
Who has time to track 10 IRAs from 6 different banks and brokers. Consider consolidating all of them into one brokerage account, which also offers brokered-CDs. Also, reduce the number of mutual funds you own by consolidating, weeding out the underperformers in the process.

8. Rolling into an IRA from a qualified retirement plan can have disadvantages
Get professional guidance before you roll over funds because you give up
(1) your ability to borrow from plans like most 401Ks
(2)10-year averaging on lump sum distributions and
(3) the benefit of preferential tax treatment of “net unrealized appreciation” on company stock owned within the plan.

9. Take early distributions if you are very wealthy and aged
If you happen to be in your 70s, 80s, or 90s, you might be increasingly concerned about estate taxes, especially if your spouse has already died. Because the full amount of your retirement funds are includable in your estate (even though your beneficiary gets an income tax deduction for the estate taxes associated with the IRA), you should consider the following:

a. Withdraw funds and gift the money to children and grandchildren, and/or trusts for their benefit, hopefully utilizing the annual gift tax exclusions. An amount equal to the income taxes paid would now be out of your estate. Also, the subsequent growth of the funds would be outside of your estate.
b. Withdraw the funds at a more rapid pace than originally planned, incur the taxes which are then out of your estate, and spend less of other investments enabling them to grow more rapidly (e.g. tax-free investments or tax-efficient mutual funds)
c. Make gifts to charities either of funds withdrawn from IRAs or by naming charities as beneficiaries.
d. Withdraw funds and invest the after-tax proceeds into a diversified portfolio of investments which can benefit from a step-up at death (e.g. appreciating stocks or mutual funds) or use the after-tax proceeds to purchase life-insurance policies owned by an irrevocable life insurance trust.

10. How to avoid the 10% penalty for withdrawals before age 59 1/2.
The better-known exceptions are death, disability, age 55 with termination of service, money used for higher education costs, and $10,000 for the first home. Also, you can take a penalty-free distribution if it is part of a scheduled series of substantially equal periodic payments made over the life expectancy of the participant and the beneficiary. By selecting a high but reasonable rate of return and by using the amortization method, you might be able to withdraw more that you could using the other permitted methods.