Life Expectancy Payments as a Beneficiary Distribution Option
By Agatha Schmidt, CISP, SDIP, CHSP
What are beneficiary life expectancy payments from an IRA and how are they calculated?
The term “life expectancy payments” as a beneficiary distribution option refers to the minimum amount that must be taken by a beneficiary from her inherited IRA every year until the account is depleted. (Similar rules generally apply to inherited retirement plan accounts.) The payment amount is calculated in the same way as the required minimum distribution (RMD) amount that an IRA owner age 72 or older must disburse from her account: the December 31 fair market value is divided by the applicable distribution period. The distribution period is taken from the IRS Single Life Expectancy Table.
Whose distribution period, or life expectancy factor, do we use?
If the IRA owner died before his required beginning date or if it is a Roth IRA, use the spouse or nonspouse beneficiary’s single life expectancy factor.
If the IRA owner died on or after his required beginning date and the beneficiary is a spouse or nonspouse, the life expectancy factor used depends on whose distribution period is the longest—the beneficiary’s or the decedent’s. For example, if the beneficiary is younger than the decedent, the beneficiary would use the single life expectancy factor that is based on the beneficiary’s age. If the beneficiary is older than the decedent, the beneficiary would use the factor based on the decedent’s age.
For a nonperson beneficiary, use the single life expectancy factor based on the decedent’s age in the year of death, minus one.
Are life expectancy payments an option for all beneficiaries?
No, not all beneficiaries can choose to take life expectancy payments. Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, an “eligible designated beneficiary,” defined as the spouse or minor child of the decedent, a disabled person, a chronically-ill person, or a person who is not more than 10 years younger than the decedent, may elect to take life expectancy payments to deplete an inherited IRA.
NOTE: The decedent’s minor child is subject to the 10-year rule upon attaining the age of majority—18 years of age, according to an IRS webpage.
“Designated beneficiaries” on the other hand, or, in general, any individual who is not an eligible designated beneficiary, cannot take life expectancy payments. Instead, they are subject to the 10-year rule.
The SECURE Act did not change the options available for nonperson beneficiaries (estates, certain trusts, charitable organizations, corporations, etc.): If the IRA owner died before her required beginning date or if it is a Roth IRA, the nonperson beneficiary does not have the life expectancy payment option; payments can be taken over a five-year period or as a lump sum. If the IRA owner died on or after her required beginning date, the nonperson beneficiary may take a lump sum distribution or life expectancy payments based on the decedent’s age.
Are annual minimum distributions required for beneficiaries subject to the 10-year rule?
For designated beneficiaries who are subject to the 10-year rule or for eligible designated beneficiaries who elect the 10-year rule, recent guidance provided in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), specifies that no minimum distributions are required before the 10th year, although the account must be depleted by the end of the 10th year. However, the publication seems to suggest that if the IRA owner died after RMDs had begun, eligible designated beneficiaries may not be able to elect the 10-year rule, implying that such inherited IRAs must be depleted through life expectancy payments, if not depleted sooner.
IRS guidance in the form of regulations is expected—hoped for—to clarify whether this post-required beginning date restriction on eligible designated beneficiaries actually applies, inasmuch as it does not appear to be borne out in the SECURE Act statutory language.
