Death before required beginning date.
If a participant or IRA owner dies
before the date mandatory distributions must
begin, the withdrawal options differ and are based
solely on the identity of the beneficiary. A
nonspouse beneficiary must take distributions
either under the five-year rule or the single life
expectancy method. In contrast, a spouse
beneficiary enjoys greater flexibility and
freedom.
The five-year rule requires that the
entire account balance be distributed to the
designated beneficiary by December 31 of the fifth
calendar year following the participant’s death.
Distributions need not be equal or periodic so
long as the entire balance is exhausted on or
before the end of the fifth year. The new
rules clarify that the five-year rule is mandatory
in these three situations:
The decedent failed to designate a
qualified beneficiary.
The decedent designated multiple
beneficiaries including a charity or nonqualified
trust, but the decedent (or his or her estate) did
not establish separate accounts by December 31 of
the calendar year immediately following his or her
death.
An individual beneficiary—who is not
the surviving spouse—failed to take the first
distribution by December 31 of the calendar year
immediately following the participant’s death.
The single life expectancy method
stretches distributions over the
beneficiary’s life expectancy, which is calculated
based on the beneficiary’s attained age on his or
her birthday in the year after the participant’s
or IRA owner’s death. The first distribution must
take place by December 31 of the calendar year
immediately following the participant’s death.
Example 3. Adam Smith died
on May 1, 2001, at age 69, leaving his
granddaughter Ann as the sole beneficiary of his
IRA. If Ann reaches age 5 on July 4, 2002, her
single life expectancy from the IRS table is 76.6
years. If Adam’s IRA balance is $650,000, Ann’s
required first-year distribution will be $8,485.64
($650,000 divided by 76.6). In each subsequent
calendar year, Ann will have to reduce her life
expectancy by a full year for distribution
purposes. A surviving spouse who is the
sole designated beneficiary may elect among the
following options:
To take distributions under the
five-year rule, as described above.
To defer distributions until the
participant would have reached age 70 12 .
To roll over the decedent’s account
balance into a new or existing IRA. If the
surviving spouse elects the second method,
distributions must be made over his or her life
expectancy, recalculated annually. When the
surviving spouse dies, the remainder of the
account is paid out over his or her remaining life
expectancy, computed using the age he or she
attained on the birthday in the year of death. The
beneficiary named by the surviving spouse is not
permitted to recalculate the surviving spouse’s
remaining life expectancy. As a general
rule, the surviving spouse should elect the
rollover method because it is flexible and has the
best opportunity for tax deferral. The new
regulations clarify that the surviving spouse may
roll over all or part of the remaining account
balance into his or her own IRA or redesignate the
decedent’s account in the surviving spouse’s name
as owner and not as beneficiary.
Death after required beginning date.
The distribution methods here are
similar to those described above when death occurs
after the required beginning date. The main
difference is the five-year rule does not apply.
When there is no designated beneficiary, the
distribution period is the participant’s remaining
life expectancy. An individual designated
beneficiary, including the surviving spouse, may
stretch out the distribution period based on his
or her own single life expectancy. Again, the
surviving spouse will benefit more by rolling over
the plan assets into a new or existing IRA.
RELIEF!
The new
regulations offer great relief to taxpayers and
CPAs who felt frustrated and befuddled by the
prior regulations. Not only have the new rules
significantly simplified the distribution
procedures, they also give taxpayers the
flexibility they need and extend the distribution
period. With the issuance of these rules, the
Treasury Department has reduced the tax and
compliance burden for the many U.S. taxpayers who
own or inherit IRA or qualified plan balances.
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