The Internal Revenue Service has just released new regulations that will dramatically affect millions of Americans -- in a good way! In a nutshell, if you have savings in a retirement account, your tax life has just become simpler and your tax exposure has likely been reduced.

Let's take a closer look at the good news -- with the caveat that I am in the middle of the process of reviewing the approximately 108 pages of regulations, and the following is my initial understanding.

The Problem
For years, the rules controlling distributions for tax-deferred retirement plans such as IRAs, 401(k)s, and 403(b)s, were impossibly complex. These sorts of plans, while all different, have a common thread: they allow individuals to stash away income before it is taxed, on the understanding that they may start withdrawing it (and paying the tax) at age 59 1/2 and that they must start withdrawing it (and paying the tax) normally soon after they turn 70.

These withdrawals, called distributions, are mandatory -- even if you don't need the money, once you hit the magic age you have to start taking your withdrawals and paying the tax on them.

Anyone who has had to take a distribution either for herself or as a beneficiary for someone who died, or who has considered this issue as he approached age 70, knows how horribly complex the old set of regulations were.

Under the previous rules, hundreds of thousands of hours were spent annually attempting to determine the required distributions from these plans. Deadlines to change beneficiaries are often missed, potentially requiring significantly higher mandatory distributions from participants. Failure to follow the rules has always been subject to a stiff penalty (although there are few instances reported where the penalty was ever assessed).

The determination of required distributions was usually dependent on such obscure factors as:

1. The age of the beneficiaries who were named at a point in time that the Internal Revenue Service called the Required Beginning Date ("RBD"), age 70 1/2.
   
   
2. The method of calculation chosen: joint-life expectancy, single-life expectancy, recalculated, non-recalculated, etc.
   
   
3. Whether there was a subsequent change in beneficiaries that would shorten the life expectancies.
   
   

Frequently, people didn't know whom they named as a beneficiary at the RBD, the time they started taking distributions. Folks lost the papers, or subsequently transferred the accounts to one or more other custodians (brokers, mutual-fund companies), making reconstructing their decision years later close to impossible.

Try getting your former broker to spend time digging through her files to find papers you filed five years ago. It's hard enough getting help even if you still have a business relationship with her!

The Solution
Not waiting for a congressional or Presidential solution, the IRS proposed regulations that will dramatically simplify the way virtually anyone with a retirement plan such as an IRA, 401(k), or 403(b) handles his or her beneficiaries and required distributions.

Forget about RBDs; forget about elections regarding recalculation; forget about another esoteric rule called the M.D.I.B. (since you can forget about it. I won't spend the four paragraphs needed to begin explaining it -- other than to say it affected people whose beneficiaries were not their spouse and were more than 10 years younger than them). Instead, get used to -- repeat after me -- TAX SIMPLIFICATION.

Even though the new regulations are technically called "Proposed Regulations," they are the law now. They are retroactive to January 1, 2001.

You can still withdraw as much as you like from your plan, as long as you pay the tax, starting at age 59 1/2. But now, calculating the amount that you must withdraw has become infinitely more simple. You also don't need to withdraw as much as before, a boon to wealthier senior citizens. And changing the beneficiaries who will inherit the money in your plan, especially if the change is done after your death, has become far easier as well.

Lower Required Distributions for Most
These new revised tables will decrease the amount "required" to be distributed annually by almost all people required to take distributions. With only one exception, as an IRA owner or plan participant, in order to calculate your distribution you simply have to look at one uniform life-expectancy table -- all you need to know is your age. (The only exception is if your spouse is your beneficiary and she is greater than 10 years younger than you, you can use the even more generous joint life expectancy figures.)

For example, if you have a $100,000 IRA, are age 72, and your beneficiary is 70, under the old rules you would be required to distribute $5,051 (if you used the joint life-expectancy tables). Under the new rules the required distribution drops almost 20% to $4,098. This is significant because, assuming you don't need the money, that $953 can stay in the account and continue to grow on a tax-deferred basis.

Enhanced Ability to Change Your Beneficiary
Since your ultimate beneficiary will not be fixed according to the name submitted when you first started taking distributions (the RBD), the IRS will now allow you, and even your heirs, greater flexibility in determining or changing your beneficiary.

The regulations appear to state that your designated beneficiary will be determined on December 31 of the year following your date of death. Therefore, not only can there be innumerable changes during your lifetime not affecting the required distributions, but there are opportunities posthumously for beneficiaries to give up their rights to get money (disclaim) so that that perhaps younger beneficiaries can receive the funds and take distributions more slowly.

Who are the winners and losers with this change?

Individuals -- Big Winners
While the reduced required distributions will only impact those who can afford to live on other assets and so don't need the distributions, simplification will save time and money for everyone.

If an individual can afford to delay taking distributions, the financial savings of this change can be dramatic, delaying taxation on hundreds of millions of dollars collectively on an annual basis.

Perhaps the only individual who is a loser is the one who has been ignoring the law and hasn't yet been caught not making the required distributions. They will clearly have a harder time in the future.

Attorneys, Accountants, and Financial Planners -- Losers
Sure, financial planners all say we want the rules simplified, but this rule over the years has ensured that December is a busy month. Being busy 11 months out of the year is fine as well.

It should be said that some professionals will breathe a sigh of relief because after all these years, they still don't understand the old rules! Oh well, I won't get to use such great cocktail party terms as "RBD," "MIB," "joint recalculate" and more ...

IRS -- Mostly a Winner
Sure, you can have a complicated tax code, requiring large distributions and penalties. But if you can't figure out who owes what, you can't collect anything.

The old rules proved to be disastrously difficult to police, while the new rules are a snap. They are going to require increased reporting from custodians, which will make it much easier to determine who is not making the required distributions.

So even though the change will save millions of dollars in tax liability for individuals, the net effect to the IRS will be positive, since it will be better able to enforce the law.

Brokers -- Winners
While they will have slightly increased reporting requirements, they, too, will have an opportunity (if you let them) to hold onto your money longer.

Summing it up so you're the first to know -- and the first to understand -- tax changes are here: they're broad-ranging, they're good, and they're SIMPLE. I'll keep you posted as the impact of the regulations becomes even clearer.

Gary Schatsky is Chairman of the National Association of Personal Financial Advisors. NAPFA is the only national association of fee-only financial advisors. As an attorney and comprehensive fee-only financial advisor, he lectures nationally on topics such as personal finance, investment planning, tax planning, and estate planning. Visit his Web site at www.objectiveadvice.com.