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Financial Information for Senior Military Officers

Your Life Expectancy After You're Dead? Yes, the IRS Says You Have One.

Your Life Expectancy After You're Dead? Yes, the IRS Says You Have One.
One of the great advantages of Qualified Plans and Traditional IRAs is that you get to deduct your contributions today and the earnings on your account accrue tax deferred.  But, the IRS wants to get that tax money...and the sooner the better.  You must take Required Minimum Distributions (RMDs) by your Required Beginning Date (RBD).  (By the way, I like this article...I've already worked in two acronyms in the first paragraph!)  For most, the RBD is 1 April of the year after you turn 70 1/2.  Most of us know that.  But most of us don't know how much we have to take out.  The amount you have to take out is based upon your life expectancy.  But you say, "I don't know how long I'll live!"  Not to worry, the IRS knows how long you will live.  They know everything...

Your Own IRA

In most cases, calculating RMDs for your IRA is relatively simple.  The IRS has a uniform life expectancy tables that will tell you how long you will live.  For example, at age 70 the life expectancy of an IRA owner is 27.4 years.  What is interesting is that if your spouse is more than 10 years younger than you, your life expectancy increases (I'll leave that to the IRS to explain).  For example, if you're aged 70 and your spouse is age 50 your life expectancy is 35.1 years.    Once you determine your life expectancy you simply divide your account balance on 31 Dec of the prior year by your life expectancy to determine your RMD.

On a related note, according to the IRS if you make it to 115 you may never die as the life expectancy for those age 115 and older is 1.9 year.  So, at each birthday after age 115 you've still got 1.9 years to live.  Again, I'll leave it to the IRS to explain.

Inherited IRAs

This is where things get a little bit more complicated.  The most complicated part is calculating the life expectancy for the deceased IRA owner...and the answer isn't what you think.  Rules are different for spouses and other beneficiaries.


Spouses.  First of all, spouses have the option to roll over an inherited IRA into their own IRA.  If they do, the rules above apply.  But rolling the inherited IRA in, may not be a good idea as it limits the ability to take distributions prior to age 59 1/2 without paying a penalty.  If the IRA is maintained as an inherited IRA then the following rules apply:


If the original owner dies before the RBD the distributions must begin on or before the later of


The end of the calendar year immediately following the calendar year in which the owner died, and


The end of the calendar year in which the owner would have attained age 70 1/2.


The RMD each year will be calculated using the life expectancy of the surviving spouse.  Again, in only logic the IRS can defend, the surviving spouse uses a different life expectancy table and at age 70 has a life expectancy of 17 years.


If the original owner dies after the RBD.


First of all, the IRA owner (deceased) must take a RMD in the year of death based on the deceased owner's life expectancy that year ( read that right) or a modified amount based on joint life expectancy.


Spousal owners of inherited IRAs must begin taking distributions by 31 Dec of the year after death.


The RMD will be based on the age of the surviving spouse, unless the surviving is older than the deceased owner then the deceased owner's life expectancy can be used (I know...I know).


Non-Spouses.  Non-spouse beneficiaries can't roll inherited IRA funds into their own IRAs.  The inherited IRA will maintain it's characteristics as an inherited IRA.


It the original owner dies prior to RBD.


The beneficiary must begin distributions prior to 31 Dec of the year after the IRA owner's death.


The RMDs will be generally be calculated based on the designated beneficiary's single life expectancy (different table than the owner's table).


However, if the designated beneficiary is older than the deceased owner, then the beneficiary may continue to use the deceased owner's life expectancy (Yup...again) to calculate minimum distributions.


If the original owner dies after beginning RMDs


Like in the case of a spouse, the deceased owner must take a distribution in the year of death...based (again) on the deceased owner's life expectancy


The RMD will be calculated based on the longer of:


The designated beneficiary's remaining life expectancy determined using the beneficiary's  age as of his or her birthday in the year following the year of the owner's death, reduced by one for each subsequent year or


The deceased owner's life expectancy (one last time...) determined using his or her birthday in the year of death reduced by one for each subsequent year.


Non-Person Beneficiary.  If a non-person, such as an estate inherits the IRA it must be paid out in 5 years.  Many times if a trust inherits an IRA it also will have to pay out the balance in 5 years.  But, if the trust is structured properly the IRA can be distributed in accordance with the rules above.


I've pretty much decided that IRA rules are the most complicated part of the Tax Code and the IRS is not forgiving.  Like many of you have heard me say, "Don't do Estate Planning without a net."  I would echo that when it comes to IRAs.  "Don't try to manage IRA payouts (inherited or otherwise) without a safety net too."  Give us a call if you need some help with this complicated area. 

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