IRA-designated beneficiary not bound by owner's pre-death withdrawal calculations.

• Author: O'Connell, Frank J., Jr.
• Position: Letter Ruling

As the U.S. population ages, it is increasingly important for advisers to have a thorough understanding of the minimum required distribution (MRD) rules for retirement plan owners who reach age 70 1/2. The wrong advice can cause plan beneficiaries to incur income tax much sooner after the owner's death than is necessary.

In Letter Ruling 200018057, the IRS ruled that IRA distributions after the death of the IRA owner could be spread over the IRA beneficiary's life expectancy, even though he had calculated his MRDs based only on his single life expectancy. The ruling surprised many advisers, who may have fallen into a common trap and recommended the distribution of the entire IRA balance within one year after the owner's death. (These same rules apply to IRA, Sec. 401(k), pension and other retirement plans.)

MRD Rules

In general, Sec. 401(a)(9) and the related regulations require an IRA owner to begin receiving MRDs no later than the required beginning date (RBD). The RBD is April 1 of the year following the year in which the IRA owner turns 70 1/2.

The MRD for any year is the value of the IRA as of December 31 of the previous year divided by the applicable life expectancy. The applicable life expectancy for a particular year is either (1) the joint life expectancy of the IRA owner and a timely named designated beneficiary (i.e., named before the RBD) or (2) the single life expectancy of the IRA owner, if he does not timely name a designated beneficiary. With either a single or a joint life expectancy, the life expectancy can be calculated by either electing to (1) reduce the IRA owner's or the designated beneficiary's life expectancy, or both, by one each year (i.e., the term-certain method) or (2) recalculate the IRA owner's or the designated beneficiary's life expectancy or both each year (i.e., the recalculation method).

The key to Letter Ruling 200018057 is to understand the "election" rules. Prop. Regs. Sec. 1.401(a)(9)-1, Q&A E-7, provides a specific "election" process for choosing whether to recalculate life expectancies or use the term-certain method. However, in determining whether to use single life or joint life expectancies, the Code and regulations specify that, if a designated beneficiary has been timely named, the MRD calculation automatically uses the joint life expectancy of the IRA owner and the designated beneficiary. Prop. Regs. Sec. 1.401(a)(9)-1, Q&A F-1, does not require any "election" to be made between joint life...