When an IRA beneficiary isn't named, there's trouble.
Do you have your own solutions/suggestions? Leave a comment at the end of the article!
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2010 is an especially confusing year to be computing required minimum distributions because of the one-year suspension of RMDs that occurred in 2009, and because of "recharacterizations" of Roth conversions. Based on the questions I've been getting, many advisors are getting this wrong.
Question: "Dora" inherited an IRA from her father who died in 2005, the year Dora reached age 47. Dora has been taking RMDs from the inherited IRA using the life expectancy or "stretch" payout method since 2006. Based on the IRS "Single Life Table," Dora's life expectancy in the year after her father's death (2006, the year she reached age 48) was 36 years. Accordingly, Dora withdrew 1/36th of the prior year-end balance of the account in 2006, 1/35th in 2007, and 1/34th in 2008. In 2009 Congress suspended RMDs for one year, so there was no RMD for 2009. Now it's 2010, and we know Dora has to resume taking RMDs this year, but how is this year's RMD computed? Does 2009 simply "drop out of the picture," so we use what would have been the 2009 divisor (33) to compute the 2010 RMD? Or do we resume RMDs as if 2009 had been a normal year and use the same divisor we would have used for 2010 if RMDs had not been suspended for a year, which is 32?
Natalie: Strangely, the answer to this question was not clear under the statute, but the IRS has clarified it: You compute your 2010 RMDs just as if 2009 had been a normal year. You do NOT get to extend the life expectancy by a year, you do NOT get to pretend that 2009 did not exist, and you are NOT allowed to use the 2009 "divisor" for 2010. The way I would explain it to clients is, you compute the RMDs absolutely normally for 2008, 2009, and 2010-you just didn't actually have to take the 2009 RMD!
The only case in which this method does not work is if 2009 was the final year of a life expectancy payout. If 2009 had been "year 36" of Dora's 36-year payout, presumably the 2010 RMD is 100 percent of the account, but there is no IRS guidance confirming that point.
Question: "Ronald" turned age 72 in 2010. In 2009, he had converted a $1 million traditional IRA to a Roth IRA. That was his first and only Roth IRA. As of December 31, 2010, the value of his Roth IRA was down to $950,000, and the value of his remaining traditional IRAs was $100,000. Then in 2010, he "recharacterized" all of his 2009 Roth conversions. He moved everything out of the Roth IRA and back into a traditional IRA in June 2010 (at which time the value of the Roth IRA was down to $900,000). He's now claiming that his RMD from his traditional IRAs in 2010 is $100,000 divided by 25.6 (the divisor for age 72 from the IRS's Uniform Lifetime Table), or $3,906.25. He claims he does not have to take any RMD from the rest of his funds because those were in a Roth IRA as of December 31, 2009, and Roth IRAs have no RMDs during the participant's life. Can this possibly be correct?
Yes, generally, there is no lifetime RMD from a Roth IRA. And yes generally the 2010 RMD from a traditional IRA is computing by dividing the December 31, 2009, account balance by the appropriate factor from the Uniform Lifetime Table for the participant's age in the distribution year. BUT IRS regulations require certain adjustments to that prior year-end account balance, to avoid game-playing.
One such required adjustment deals with Ronald's maneuver: You must add to the 2009 year-end account balance, for purposes of computing the 2010 RMD, any 2009 Roth conversions that were "recharacterized" in 2010. The amount of the adjustment is the dollar amount that was transferred back into a traditional IRA to effect the recharacterization (not the prior year-end balance of the Roth account).
So in Ronald's case, his 2009 year-end account balance for purposes of computing his 2010 RMD is the actual prior year-end balance ($100,000) plus the amount contributed to the traditional IRA in June 2010 to effect the recharacterization ($900,000), for a total of $1,000,000. His 2010 RMD is therefore $1 million divided by 25.6 or $39,062.50, not $3,906.25.
Resources: Regarding how the 2009 one-year suspension affects computation of post-2009 RMDs, see IRS Publication 590, IRAs (2009), Examples 1 and 2 (p. 34), and first example under "What Age(s) Do You Use With the Table(s)?", p. 37. Regarding adjustments required to the prior year-end balance for purposes of computing RMDs, see Reg. § 1.401(a)(9)-7, A-2, last sentence, Reg. § 1.408-8, A-8(b), and ¶ 1.2.06-¶ 1.2.07 of Life and Death Planning for Retirement Benefits (7th ed. 2011).
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