IRA distributions: to recalculate or not.
The Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. and related regulations under Sec. 401(a)(9) require annual minimum distributions to be taken by an individual retirement account (IRA Ira, in the Bible
Ira (ī`rə), in the Bible.
1 Chief officer of David.
3 Two of David's guard.
IRA. ) owner beginning in the year the account holder reaches age 70 1/2. The initial distribution may be delayed no later than April 1 following the calendar year in which the taxpayer reaches age 70 1/2 (also known as the "required beginning date"); however, deferral deferral - Waiting for quiet on the Ethernet. of the initial distribution will require two years' worth of distributions in the following year.
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 re·cal·cu·late
tr.v. re·cal·cu·lat·ed, re·cal·cu·lat·ing, re·cal·cu·lates
To calculate again, especially in order to eliminate errors or to incorporate additional factors or data. (or life expectancy Life Expectancy
1. The age until which a person is expected to live.
2. The remaining number of years an individual is expected to live, based on IRS issued life expectancy tables. ) method and the fixed-number-of-years method. The IRA owner must irrevocably ir·rev·o·ca·ble
Impossible to retract or revoke: an irrevocable decision.
ir·rev 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
The Custodians is terminology in the Bahá'í Faith, which refers to nine Hands of the Cause assigned specifically to work at the Bahá'í World Centre in attendance to the Guardian of the Faith. have election forms available; otherwise, any written format should be sufficient.
Calculating Minimum Distributions
* Recalculation method Recalculation method
A method of calculating required minimum distributions from a retirement plan using life expectancy tables. Unisex data tables allow a plan holder to determine the applicable life expectancy each year a distribution is required. : This uses the IRA owner's life expectancy, redetermined on an annual basis, to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. 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 de·fer 1
v. de·ferred, de·fer·ring, de·fers
1. To put off; postpone.
2. To postpone the induction of (one eligible for the military draft).
v.intr. 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 Annuity starting date
The date when an annuitant starts receiving payments from an annuity. 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 spou·sal
1. Of or relating to marriage; nuptial.
2. Of or relating to a spouse.
Marriage; nuptials. Often used in the plural. beneficiaries have an additional alternative on the IRA owner's death: the inherited inherited
received by inheritance.
inherited achondroplastic dwarfism
see achondroplastic dwarfism.
inherited combined immunodeficiency
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 Excess accumulation
The amount of a required minimum distribution that an IRA holder fails to remove from an IRA in a timely manner. Excess accumulations are subject to a 50% IRS penalty tax. excise taxes excise taxes, governmental levies on specific goods produced and consumed inside a country. They differ from tariffs, which usually apply only to foreign-made goods, and from sales taxes, which typically apply to all commodities other than those specifically exempted. 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.