I have written several times that on reaching 70 1/2, a person with more than one IRA could take the mandatory distribution from any account he or she wished, as long as the total withdrawn was at least as much as the required minimum, based on the aggregate total of all accounts. Well, that was right then, and is still true now.
But this flexibility is threatened. In the July 27 Federal Register, the IRS published a proposed rule that would change the withdrawal regulations from the "aggregate" method to requiring that each account "... separately satisfy the minimum distribution requirement... ." The proposed rule would be effective for years after 1987; withdrawals through Dec. 31 may still be made from the IRA of your choice.
This change, if approved, means that starting next year, you would have to look at each individual account separately and calculate the minimum mandatory withdrawal for each year based only on the balance in that particular account. The calculations would be further complicated by the need to keep separate records of already-taxed and tax-deferred contributions (if you make taxable contributions to your IRA in 1987 or later years).
Although the IRS may have valid reasons for making this change, I think it unnecessarily complicates an already complex situation, which -- judging from my mail -- is not fully understood by many even now. The IRS will accept written comments about the proposed change, and will also entertain requests for a public hearing. Write to Commissioner of Internal Revenue, Attention: CC:LR:T (EE-113-82), Washington, D.C. 20224. Your letter must be postmarked not later than Sept. 25.
I also have written that the mandatory initial distribution date for IRA owners who reached age 70 1/2 in either 1985 or 1986 had been postponed until Dec. 31. The same proposed rule contains a formula for determining the minimum amount that must be withdrawn by the end of this year to satisfy the requirements for the preceding year(s) and the current year.
The rules are somewhat complicated; I plan on dealing with them in detail later on in the year. However, here's an advance warning: The formula is based on the value of your IRAs on Dec. 31, 1986. If you reached the 70 1/2 milestone in either 1985 or 1986, be prepared: if you don't already have the number, you should latch on to that Dec. 31, 1986, figure and have it handy.
While we're on the subject of IRAs, I have just seen the proof format of IRS Form 8606, the new form to be added to your 1987 tax return to account for the tax status of both contributions and distributions for calendar year 1987. The Tax Reform Act of 1986 restricted the deduction for IRA contributions for people who are covered by an employer pension plan and whose income exceeds specified limits. Because contributions without a corresponding tax deduction are authorized for those who are caught by this ceiling, some calculations may also be necessary on distributions, to be sure you are not taxed a second time when withdrawing funds on which tax had already been paid.
The form itself is not really difficult and has pretty clear line-by-line entries; but the accompanying instructions may be a little intimidating, comprising four pages and including two worksheets.
In fact, after looking at the proofs for Form 8582 ("Passive Activity Loss Limitations") and Form 8598 ("Computation of Deductible Home Mortgage Interest"), I may have to eat my earlier words about simplification. I still believe that overall the system will be simpler, mostly because millions of people will not have to file at all, and other millions who had been itemizing will take the standard deduction.
But for those people with special situations, tax time may turn out to be more nightmarish. Unfortunately, tax preparers are going to be almost as confused as the rest of us. Moral: Get started early so you have an opportunity to get your questions answered before the inevitable last-minute rush.
Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E.M. Abramson, The Washington Post, Business &Finance News, 1150 15th St. NW, Washington, D.C. 20071.