About the Recalculation Option

BY CHRIS E. PETERSON

I believe the article, “How to Maximize IRA Accumulations” ( JofA, Dec.00, page 32), contained a number of inaccuracies. The most significant was that a CPA should not recommend recalculation when figuring the client’s mandatory IRA distribution.

The article states that “recalculation is not an option for non-spouse beneficiaries.” This could not be further from the truth. IRS Publication 590 clearly states this is an acceptable option and even gives an example using this technique.

Each client’s situation is different. However, if the goal is to stretch the IRA for the longest possible time period, recalculation is the right way to accomplish it.

Chris E. Peterson, CPA
Littleton, Colorado

Author’s reply: My statement “Recalculation is not an option for non-spouse beneficiaries” is not inaccurate. The IRA owner’s life expectancy can be recalculated, as can the spouse’s when the owner’s spouse is the sole beneficiary. However, if there is a non-spouse beneficiary, then the owner’s life expectancy can be recalculated each year, but the designated beneficiary’s life expectancy cannot in determining the joint life expectancy of the IRA owner and the designated beneficiary.

Advising CPAs not to use the recalculation method was intended to prevent the problems associated with the owner’s life expectancy’s becoming zero after his or her death when the recalculation method is used. If the owner recalculates and there is a non-spouse beneficiary, then, beginning in the year after the IRA owner dies, the owner’s life expectancy is recalculated to zero. Consequently, all future distributions are based on the remaining single life expectancy of the designated beneficiary, shortening the distribution period.

There can be similar problems when the owner recalculates and the spouse is the sole beneficiary. Should the spouse die first, when the owner dies the distribution period will be shortened when the owner’s life expectancy is recalculated to zero in the following year. Although in certain situations recalculation can slightly extend the distribution period, it is not without risks and it could significantly shorten the distribution period.

Linda M. Johnson, CPA
Kennesaw, Georgia

Editor’s note: On January 11 of this year, the Treasury Department issued new proposed regulations on distributions from IRAs and other retirement plans. The proposed regulations, effective January 1, 2002, will change some of the rules that are described here.

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