Changing RMD Formula

Submitted by Bill Jones on Thu, 2015-07-23 07:40

I have a client who was the beneficiary of a $250,000 Governmental 457 plan. The client was the wife of the account holder, and she was 15 years younger than her spouse. The spouse who passed away was 88. The wife was 73. The wife elected to keep the money in the 457 plan, and begin receiving the RMDs under the joint life expectancy tables because she was over 10 years younger than the husband. Now, she is arguing that she can rollover the 457 plan assets to her own individual traditional ira. If she did this, then she said that she would be able to use a divisor which is much higher (24 versus the 15 that is being used now). By allowing for a new RMD table and calculation, she claims that she can reduce her RMD amount by roughly $7,000 per year.

The question is: once she has elected and began to receive the RMDs under the joint life expectancy table, can she now all of a sudden switch and rollover those funds to a traditional ira, and elect to receive a now more favorable payout based on her life expectancy only, and thus reducing her RMD and potentially saving her thousands of dollars per year in taxable income ?



Submitted by Alan - IRA critic on Thu, 2015-07-23 17:02

  • Actually, she was not entitled to use the joint table after the year of her husband’s death. Table II only applies while both spouses are living. She should have been using Table I all along, so she has taken insufficient RMDs from the plan. She can probably get the penalty waived by filing a 5329 and bringing the shortfall current, since the plan administrator erred by allowing use of the wrong table. The plan may also have problems with the IRS as a result.
  • At this point, she should roll this plan balance over to her own IRA and begin using the Uniform Table. RMDs will be much lower than continuing an inherited account, and the stretch provisions for HER beneficiary will be protected. Assuming that the husband’s death was prior to 2015, the plan should withhold her correct beneficiary RMD from the IRA rollover, and her reduced Uniform Table RMDs begin next year.


Submitted by Bill Jones on Fri, 2015-07-24 21:05

So, if I understand correctly, the administrator should have been using the single life expectancy table–Table 1–and not Table 2 (joint) because the spouse is still living, and because they used Table 2 a smaller RMD was taken out than what have been required under table 1. Is this correct ?So, in this case, it probably would have made sense for her to rollover the funds over to an IRA after her husband’s death if the major concern was reducing the RMD because in that case Table 3 would have been used for RMDs from an IRA ?



Submitted by Alan - IRA critic on Fri, 2015-07-24 22:11

Yes, you are correct regarding both questions, except that Table II ended with the year of death of first spouse to pass because that was the final year that both spouses were living.



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