[IMGCAP(1)]Tax practitioners and their baby boomer clients are beginning to cope with a monumental financial and tax event—the onset of required minimum distributions from traditional IRAs and qualified plans.

This article, the second installment in a series, focuses on calculating lifetime non-annuity RMDs. The first installment explained when RMDs must commence, choices for first and second year required distributions, and how to satisfy the RMD rules. The third and final installment covers lifetime RMDs from multiple IRAs, the potential role of qualified charitable contributions, and withholding on RMDs.

Calculating Lifetime Non-Annuity RMDs
Annual lifetime non-annuity RMDs from an IRA are calculated as follows:

• Determine the IRA balance as of the end of the year before the distribution year.

• Divide that adjusted IRA balance by a life-expectancy factor obtained from an age-based table. The table is used in all cases to determine lifetime RMDs, except where the IRA owner's sole beneficiary is a spouse who is more than 10 years younger than the owner.

IRA balance used to calculate lifetime non-annuity RMDs. The IRA balance, which is divided by the life-expectancy factor to determine annual lifetime non-annuity RMDs from an IRA, is the balance in the account at the end of the year before the distribution year, i.e., the year for which the RMD is being determined. There are no adjustments to the ending balance, except in the case of certain rollovers and transfers (covered later). Note that the account balance does not include the value of any qualifying longevity annuity contract, as defined in Reg. § 1.401(a)(9)-6, Q&A-17, that is held under the plan.

When calculating each year's RMD, a taxpayer does not get a “credit carryforward” for a prior-year IRA distribution in excess of the RMD for that prior year.

Observation: Although there is no “credit carryforward” for distributions in excess of the RMD, excess distributions have the effect of reducing future RMDs over the remaining distribution period. That's because future IRA balances are reduced by the excess amounts to calculate the RMD for each year.

Rollovers and trustee-to-trustee transfers. The following rules apply when an amount is distributed by one IRA (distributing IRA) and is rolled over to an IRA (the receiving IRA) within 60 days of the payout from the distributing IRA or is transferred between IRAs via trustee-to-trustee transfer:

• If a rollover is made, the amount is treated as a distribution by the distributing IRA for purposes of the Code Sec. 401(a)(9) rules, notwithstanding the rollover. However, under Reg. § 1.402(c)-2 , Q&A 7, an RMD can't be rolled over to another IRA.

• If a trustee-to-trustee transfer is made, the transfer is not treated as a distribution by the distributing IRA for purposes of the RMD rules.

Rollover incomplete as of year-end. An IRA-to-IRA rollover may be initiated in one calendar year and completed (i.e., deposited into the receiving IRA) in the following calendar year. In this case, for purposes of determining the RMD for the calendar year in which the rollover is actually received, the account balance of the receiving IRA as of December 31 of the preceding year must be adjusted by the amount received.

Recommendation: To avoid potential complications (including the mandatory 20 percent tax withholding rule for eligible rollover distributions), taxpayers receiving or about to receive RMDs should use trustee-to-trustee transfers to move money around in their retirement accounts, not rollovers.

Recharacterizations. If an amount from a traditional IRA is contributed to a Roth IRA as a conversion contribution, and the conversion amount (plus net income allocable to the conversion) is transferred to another IRA (transferee IRA) in a subsequent year as a recharacterized contribution, the recharacterized contribution (plus allocable net income) must be added to the December 31 account balance of the transferee IRA for the year in which the original conversion occurred.

Life expectancy factor used to calculate most lifetime RMDs. Unless an IRA owner's spouse is the sole beneficiary and is more than 10 years younger than the owner, the annual RMD paid to an IRA owner during his or her life is found by dividing the IRA balance as of the end of the calendar year preceding the distribution calendar year by a life expectancy factor from a Uniform Lifetime Table carried in Reg. § 1.401(a)(9)-9, Q&A 2, portions of which are reproduced below. The table is used to figure RMDs for all distribution calendar years up to and including the distribution calendar year that includes the IRA owner's date of death. This table for lifetime distributions is used whether or not the IRA owner designates a beneficiary for his or her account.

Observation: The term “distribution period” in the table is synonymous with “life expectancy.”

Uniform Lifetime Table for Determining IRA Owner's Required Distribution Period

Age of the IRA Owner

Distribution Period

70

27.4

71

26.5

72

25.6

73

24.7

74

23.8

75

22.9

76

22

77

21.2

78

20.3

79

19.5

80

18.7

81

17.9

82

17.1

83

16.3

84

15.5

85

14.8

86

14.1

87

13.4

88

12.7

89

12

90

11.4

91

10.8

92

10.2

93

9.6

94

9.1

95

8.6

Observation: The life expectancies (or distribution periods) in this table are identical to the joint and last survivor life expectancies in the Joint and Last Survivor Table in Reg. § 1.401(a)(9)-9, Q&A 3, for an individual age 70 or older, and a beneficiary who is exactly 10 years younger than the individual. In other words, even if IRA owners do not designate a beneficiary, they may take RMDs over the joint and last survivor life expectancy of a person with a beneficiary exactly 10 years younger than they are.

For purposes of applying the life expectancy factors in the uniform table, the IRA owner's age is determined as of his or her birthday in the relevant distribution calendar year.

Recommendation: When explaining the concept of RMDs to clients, it may be simpler to express the RMD for each year as a percentage of the previous year's ending balance, instead of explaining that the ending balance must be divided by a life expectancy factor. Each year's RMD, expressed as a percentage, can be found by dividing the number 1 by the distribution period.

If the IRA owner dies on or after his required beginning date, the RMD for the year of death is calculated as if he or she had lived throughout that year. The RMD for the year of death must be distributed to the beneficiary to the extent that it has not already been distributed to the IRA owner.

Life expectancy factors for IRA owner and much younger spouse-beneficiary. If the IRA owner's spouse is the sole designated beneficiary of the account, and the spouse is more than 10 years younger than the owner, the distribution period is the longer of:

1. The distribution period found by using the regular Uniform Lifetime Table (see discussion above), or

2. The distribution period measured by the joint life and last survivor life expectancy of the IRA owner and the owner's spouse, determined by using the IRA owner's and spouse's attained ages in the distribution year. These life expectancies are determined using the Joint and Last Survivor Table in Reg. § 1.401(a)(9)-9, Q&A 3.

Observation: The regular table used to determine lifetime RMDs carries the same life expectancy factors as are found in the Joint and Last Survivor Table in Reg. § 1.401(a)(9)-9, Q&A 3, for an individual age 70 or older whose beneficiary is exactly 10 years younger than the individual. Thus, the rule above that allows the joint and last survivor table in Reg. § 1.401(a)(9)-9, Q&A 3, to be used is of practical significance—i.e., it will produce a longer payout period—only where the IRA owner's spouse and sole beneficiary is more than 10 years younger than the IRA owner.

Robert Trinz is a senior analyst with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.

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