Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

only the RMD starting at age 70½, and the account has a steady six percent annual investment return, the account will have more dollars in it when he reaches age 89 than it did when he started taking RMDs at 70½. The Uniform Lifetime Table is the IRS’s way of implementing the Tax Code’ s rule that benefits must be distributed either in full on the RBD, or, “beginning not later than the required beginning date...over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).” § 401(a)(9)(A)(ii) . But instead of using the joint life expectancy of the participant and his “real” beneficiary, the IRS gives every participant a hypothetical 10-years-younger beneficiary and the RMD payout is calculated based on the life expectancy of this hypothetical beneficiary. “[I]f the sole designated beneficiary of an employee is the employee’s surviving spouse, for required minimum distributions during the employee’s lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with…[the Uniform Lifetime Table] or the joint life expectancy of the employee and spouse using the employee’s and spouse’s attained ages as of the employee’s and the spouse’s birthdays in the distribution calendar year.” Reg. § 1.401(a)(9)-5 , A-4(b)(1). Note that this formulation mandates annual recalculation ( ¶ 1.2.04 (A)) of the participant’s and spouse’s life expectancies. The Joint and Last Survivor Table ( ¶ 1.2.03 ) will produce larger ADPs (divisors) and smaller RMDs than the Uniform Lifetime Table if the spouse-beneficiary was born in a year more than ten years later than the year of the participant’s birth. For example, if the participant was born in 1946, the joint table will provide larger divisors than the Uniform Lifetime Table if the spouse was born in 1957 or later. See ¶ 1.3.04 and ¶ 1.3.05 regarding the much-younger-spouse calculation when the participant has multiple plans or separate accounts within a single plan; and note the following additional points regarding this method: A. No election required. The participant does not have to elect to use the joint life expectancy of the participant and spouse as his ADP. If the participant’s spouse is his sole beneficiary, then the participant’s divisor is automatically the ADP determined under the Uniform Lifetime Table, or under the Joint and Last Survivor Table, whichever is larger. Vinny Example: Vinny is 74 and his wife Marie is 63. Marie is sole beneficiary of Vinny’s IRA. Vinny uses the Uniform Lifetime Table to compute his RMD for the year, being unaware he was entitled to use the Joint and Last Survivor Table. As a result, he takes a distribution that is larger than his actual required distribution. If he discovers the mistake soon enough he can roll the excess distribution back in to his IRA. See ¶ 2.6 regarding rollovers. Lifetime RMDs: Much-younger-spouse method As generous as the Uniform Lifetime Table is, the participant enjoys even smaller RMDs if his sole beneficiary is his more-than-10-years-younger spouse.