IRA distributions: to recalculate or not.
Distribution Calculation Options
Fixed- number- Recalculation of-years method method
Unmarried IRA owners: Single life expectancy X X Joint life expectancy (owner and oldest beneficiary) X(1) X
Married IRA owners: Single life expectancy X X Joint life expectancy (owner and spouse) X(2) X
(1) Only the owner's life is recalculated.
(2) Owner's life alone, spouse's life alone, or both owner's and spouse's life expectancies may be recalculated. Death of an individual whose life expectancy is being recalculated causes the acceleration of the distributions, regardless of whether the individual is the owner or the spouse.
If minimum distribution payments have begun prior to an IRA owner's death, post-death distribution requirements will vary, depending on which method was elected to calculate the amount of the minimum distributions. The available options are the recalculation (or life expectancy) method and the fixed-number-of-years method. The IRA owner must irrevocably elect the form of benefit calculation in writing prior to the required beginning date.
The form of the election is not specified in the regulations. Some IRA custodians have election forms available; otherwise, any written format should be sufficient.
Calculating Minimum Distributions
* Recalculation method: This uses the IRA owner's life expectancy, redetermined on an annual basis, to compute the minimum distribution required each year. This method generally expands the number of years over which distributions may be taken, so it is often the preferred method for taxpayers who want to defer income and reduce their income tax liability. Unfortunately, it is also the method that allows for the least amount of flexibility on an IRA owner's death.
At death, the owner's life expectancy is reduced to zero, which would cause the entire balance to become distributable in the following year. Note that the regulations specify the recalculation method as the "default" method if an alternative method has not been properly elected.
* Fixed-number-of-years method: This method computes the required minimum distribution over a fixed number of years, not to exceed the IRA owner's life expectancy as of the date minimum distribution begins. The number of years is calculated at the annuity starting date and the subsequent-year payments are determined by reducing the initially calculated term by one for each year thereafter. The advantage to this method is that it survives the IRA owner's death. Payments may continue to a spouse or nonspouse beneficiary over the remaining fixed number of years. In addition, the beneficiary has the option to accelerate the payments if he so desires.
Both methods also permit the use of a joint life expectancy in calculating required minimum distributions, whether or not the IRA owner is married. The chart on page 477 summarizes the available options.
Under either method, spousal beneficiaries have an additional alternative on the IRA owner's death: the inherited IRA can be "rolled over." This alternative available only to spouses is allowed whether or not required minimum distributions have begun. The rollover can be to a separate account or to the spouse's own IRA, although it is generally recommended that the inherited funds be kept separate for greater planning flexibility. A surviving spouse may not roll over any required minimum distributions not taken by the IRA owner in the calendar year of the owner's death.
A spouse beneficiary may also elect to treat the inherited IRA as his own IRA without rolling it over. Minimum distributions must not have been taken prior to the IRA owner's death, and the surviving spouse can make no additional contributions to the IRA.
Choosing the best distribution option depends on many personal factors. The recalculation method is recommended primarily for those individuals who believe they will live at least as long as their calculated life expectancy. Recalculating both lives is often the preferred method for married IRA owners. It considerably lengthens the period of time over which distributions may be taken, while the fixed-number-of-years method may require the entire account balance to be withdrawn prior to the second death. In addition, recalculation allows distributions to be increased in any year in which an increased cash flow is needed (or desired), without being tied to a more rapid withdrawal schedule.
If the IRA owner and/or the spouse are in poor health, recalculation may not be recommended. The life expectancy of the person in poor health should not be recalculated, to avoid the acceleration of payments on that person's death.
Also, IRA owners with significantly large IRA account balances should consider not recalculating at least the spouse's life expectancy. On the owner's death, the spouse will, of course, have the opportunity to roll the IRA over; however, if the spouse dies first, or they die together, the payments will be rapidly accelerated, increasing the potential excess distribution and/or excess accumulation excise taxes under Sec. 4980A.
Even an unmarried IRA owner (assuming he is in good health) should consider electing the recalculation method. Even though only the owner's life expectancy may be recalculated, distributions may continue over the beneficiary's lifetime after the owner's death, as long as the joint life expectancy tables are used to calculate the payments.
Additional factors to consider include the age, health and wealth of one's spouse and heirs. Every individual's circumstances will vary, and it is necessary to review all of the relevant information. In either case, it is important for every IRA owner to choose and elect a distribution option in a timely fashion rather than simply defaulting into the recalculation method.