To recalculate or not to recalculate life expectancies.

• Author: George, Dick
• Position: Retirement plans

When a participant in a qualified retirement plan or individual retirement account (IRA) reaches age 70 1/2, distributions must begin. One of the decisions that must be made at this time is whether to recalculate life expectancy. Often this decision is made without fully considering the impact of the different alternatives. The wrong decision can result in accelerated payout of plan assets that could otherwise be deferred. See Prop. Regs. Sec. 1.401(a)(9)-1, Q&As E-6, E-7 and E-8.

The effect of recalculating life expectancy can best be demonstrated by an example. Assume a participant is 70 1/2 in 1994 and also has his seventieth birthday in 1994. The minimum required distribution is calculated by taking the balance in the plan on Jan. 1, 1994, and dividing by the participant's life expectancy (16 years). If life expectancy is not recalculated each year, one is subtracted from the beginning divisor (1995-15 years; 1996-14 years, etc.). If life expectancy is recalculated, an IRS table will provide a new divisor each year (1995-15.3 years; 1996-14.6 years, etc.).

The proposed regulations on how to calculate the minimum required distribution for a participant in a qualified retirement plan or IRA allow much flexibility. These regulations permit life expectancy to be recalculated for both the employee and/or spouse. When the spouse is the designated beneficiary for the plan, four options are available to a participant.

1. No recalculation of life expectancy.

2. Recalculation only for the participant.

3. Recalculation only for the spouse.

4. Recalculation for both the participant and the spouse.

If someone other than a spouse is the designated beneficiary, only Options #1 and #2 are available (assuming the plan allows an option).

Under Prop. Regs. Sec. 1.401(a)(9)-1, E-7, one must look at the plan to determine the available options. If the plan is silent on this question, recalculation is mandatory for both the participant and spouse. Alternatively, the plan can have a specific provision mandating one of the four options. Finally, the plan can allow the participant to elect one of the four choices. This election is irrevocable and must be made before the required beginning date (April 1 following the year in which the participant attains age 70 1/2). If no election is made, the plan can specify which option to use. If it does not specify and there is no election, recalculation is mandatory for both the participant and/or spouse. The regulations...