Recalculation vs. Nonrecalculation—Calculating Life Expectancy Payments Correctly
By Jodie Norquist, CIP
When an IRA owner dies, his beneficiaries may turn to you, as the IRA trustee, custodian, or issuer, for help navigating their beneficiary payment options. You’ll often need to determine what those options are, one of which could include taking life expectancy payments. Life expectancy payments are certain minimum amounts that beneficiaries must withdraw annually from inherited IRAs (they can always withdraw more than the minimum). In some circumstances, you may be asked to help calculate these payments. To do so, you’ll need to know how to calculate them and when to use the recalculation method versus the nonrecalculation method.
Before calculating payments, be sure to check the IRA plan agreement, which will specify whether life expectancy payments apply, depending on when the IRA owner died and, if death occurred in 2020 or later, whether the beneficiary is an eligible designated beneficiary. Though the Setting Every Community Up for Retirement Enhancement (SECURE) Act significantly decreased the beneficiary payment options for beneficiaries of IRA owners who died in 2020 and later, certain beneficiaries, called “eligible designated beneficiaries,” are still eligible to take life expectancy payments. An eligible designated beneficiary is the spouse, the IRA owner’s minor child, a disabled individual, a chronically ill individual, and an individual who is not more than 10 years younger than the IRA owner.
Recalculation or Nonrecalculation Determines the Distribution Period
When calculating life expectancy payments, divide the prior year’s December 31 account balance by a life expectancy divisor, called the distribution period. Beneficiaries must use the Single Life Expectancy Table, which can be found in Appendix B of IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), or in Treasury Regulation 1.401(a)(9)-09, Q&A 1, to obtain the distribution period.
The distribution period is determined each year using either the “recalculation” method or “noncalculation” method. The difference depends on the relationship between the beneficiary and the deceased IRA owner. Only spouse beneficiaries use the recalculation method, while nonspouse beneficiaries use the nonrecalculation method. (A simple way to remember this is nonspouse beneficiaries = nonrecalculation.)
Recalculation means referring to the Single Life Expectancy Table each year to “recalculate” a life expectancy payment. So in the first distribution year and in all subsequent years, a spouse beneficiary will need to look at the age that he will become in that distribution year on the Single Life Expectancy Table to find the applicable distribution period, or life expectancy divisor.
Nonrecalculation means referring to the Single Life Expectancy Table only once, during that first distribution year (the year following the year of death), and then for subsequent years, subtracting one from the life expectancy divisor used in the previous year.
If there are multiple beneficiaries named and separate accounts for each were not established by December 31 of the year after the IRA owner’s death, then only the oldest designated beneficiary’s age can be used to determine the single life expectancy divisor. This divisor will apply to all beneficiaries.
If a nonperson beneficiary (e.g., an estate or charity) has been named (and death occurred after the IRA owner’s required beginning date), then life expectancy payments are based on the single life expectancy of the deceased IRA owner. A qualified trust, generally an irrevocable trust, may have additional options.
Life Expectancy Payments Are Waived in 2020
It’s important to let beneficiaries know that they may have to pay a penalty tax if they don’t take their life expectancy payment, or required minimum distribution (RMD), each year. Beneficiaries are subject to an excess accumulation penalty tax of 50 percent of the amount that should have been distributed. But for the 2020 calendar year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted on March 27, 2020, waived the RMD requirement for IRA owners and beneficiaries.
