Inherited IRA divisor
My understanding is that the beneficiary of an inherited IRA must maintain the original beneficiary’s LE divisor reduced by one each year.
However after reading pub 590 and various searches, I can’t find the text to support this understanding.
1) Where is it actually stated that the inherited IRA maintains the original beneficiary’s life expectancy no matter how many times it’s inherited.
2) Does the “reduced by 1” start at the original beneficiary’s age at death? For ex, the divisor on table 1 is 34.2 for age 50. If that was the divisor being used by the beny at age of death, then the new heir would simply use that and reduce by 1, yes? (because the table reduces by less than 1 for the original beneficiary.
Thanks!
G
Permalink Submitted by Alan Spross on Wed, 2008-05-21 22:04
1) You are right, this is NOT stated in Pub 590, but is stated in the IRS Regs Sec 401a(9)(5) Q&A #7 part of which is copied below:
(2) If the individual beneficiary whose life expectancy is being used to calculate the distribution period dies after September 30 of the calendar year following the calendar year of the employee’s death, such beneficiary’s remaining life expectancy will be used to determine the distribution period without regard to the life expectancy of the subsequent beneficiary.
>>>>> >>>>>>>>>>
Why this provision has not been simply stated in Pub 590 is anyone’s guess.
2) The original beneficiary’s age that applies is the year after the owner’d death, which is the first year of that beneficiary’s RMD for non spouses. In your example if the designated beneficiary’s birthday in the year following the owner’s death was the 50th, the divisor would be 34.2 and would then be reduced by 1.0 each year thereafter even if a successor beneficiary inherited the account. The 1.0 reduction is also referred to as “non recalculated” as opposed to going into the table for a new factor each year. A sole surviving spouse beneficiary CAN recalculate by picking up the table divisor each year. This differing treatment is described in Pub 590 on p 38 “What Age do you Use…”
Permalink Submitted by greg gass on Thu, 2008-05-22 14:49
That’s excellent – thanks. I see the reg’s and that certainly answers the questions.
Where do you see reference to the non-recalculated method? Is the fact that the original beneficiary deceased simply imply that they can’t recalculate their life expectancy because, after all, they are deceased?
Also, is it just assumed that this applies to IRAs even though the regs are discussing DC plans? [edit: I see that in 1.408-8 the same rules apply to IRAs]
G
Permalink Submitted by Alan Spross on Thu, 2008-05-22 21:51
1) Pub. 590 does not actually use the “non/or/recalculation” term. That is a popular description for the divisors referred to on p 38 at the top of the 2nd column. The 1.0 reduction for non spouses is considered non- recalc and at the end of the paragraph it indicates a surviving spouse should use their actual age each year and this is considered “recalculation”. This refers to designated beneficiaries, whereas successor beneficiaries named by the original beneficiary and taking RMDs are addressed in the Regs. as posted previously.
Since both the spouse and the non spouse beneficiaries would still be living, I assume that the recalc option for the spouse might exist because only a spouse can assume or roll over the IRA as their own at anytime and recalc is always used for owners. The non spouse beneficiary cannot assume or roll it over. A spouse beneficiary with other beneficiaries (not sole beneficiary) must use the 1.0 reduction probably because they cannot assume the IRA. That said, the survivor can still distribute their share and roll it over to their own IRA from which they can recalculate, plus get the benefit of the uniform table joint life expectancy.
2) The table is originally entered using the age of the beneficiary in the year following owner’s death. The 1.0 reduction first takes effect on the following year, ie the second year after the owner’s death.
3) Yes, IRAs following the DC plan RMD requirements in most cases.