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New IRA Rules Will Force More Oversight


BOSTON - New Internal Revenue Service regulations adopted in January change the required minimum distribution rules for retirement plans and will force IRA custodians and trustees to monitor their IRA clients' accounts more closely, according to industry executives.

The new regulations will simplify the process of calculating the date on which IRA owners begin taking required minimum distributions and will stretch out distributions over longer periods, but those improvements over the old regulations will come with a catch, according to John Singletary, a vice president in the private client services' IRA product management division of SunTrust Bank of Atlanta.

In the past, individual IRA owners were required to calculate their required minimum distributions, but the new rules will place the onus of accurately calculating required minimum distributions on fund companies and other IRA custodians and trustees, according to Singletary.

Singletary spoke here at a conference last week on capturing and retaining IRA rollover assets, sponsored by the Institute for International Research of New York.

Although the current IRS is a kinder, gentler version of itself compared to recent years, it has indicated it will take a harder stance on any oversights in calculating distributions, Singletary said. In the past, the IRS has been generally willing to waive penalties resulting from any oversights in calculating required minimum distributions because the old rules were so complicated, he said.

As in the past, the IRS will levy a 50 percent penalty on any shortfalls in distribution calculations, but IRA custodians and trustees can expect a new level of vigilance from the

IRS, according to Singletary.

The new regulations become effective Jan. 1, 2002 but the regulations can be used beginning this year to determine IRA required minimum distributions, according to Singletary.

And while the rules place greater responsibility on advisers in calculating required minimum distributions, the rules are simpler and more advantageous for customers, he said.

"It's a no-brainer [for advisers] to go with the new rules," he said.

The new regulations also provide IRA trustees with a marketing opportunity, according to Charles J. Di Vencenzo, vice president and director of advanced product marketing for The Hartford Financial Services Group of Simsbury, Conn. At a time when most IRA owners are disgruntled about diminished returns, the new regulations give advisers an opportunity to provide clients with information about how the changes will affect them, he said.

Also, a new regulation adopted by the IRS requires that assets in an IRA not be distributed until the Dec. 31 following the death of the account holder, he said. That gives advisers the opportunity to discuss with beneficiaries various options for disposing of their assets, he said. That should help prevent some IRA assets from being invested with other firms, according to DiVencenzo.

While the beneficiaries are likely to liquidate some of the assets, advisers will now have a chance to retain what is left.

"[Beneficiaries] want to pay for their kids' education, buy a new Porsche or take a vacation," he said. "But encourage them to keep the rest with you."

There are nearly 34.7 million U.S. households that own IRA accounts and approximately 5.2 million are subject to required minimum distributions. Making clients aware of the new regulations is not only important, but can also help strengthen ties with clients, further protecting IRA assets, he said.

However, before fund companies undertake to plan with customers how they might dispose of their required minimum distributions, they must offer a product that might persuade clients to keep their assets with them, DiVencenzo said. Any such product must be as simple as possible.Firms offering the product also must make sure clients are aware of any tax consequences associated with taking advantage of it, he said. In order to provide flexibility, it is important to provide a variety of funding and distribution options, he said.