Advanced Underwriting Consultants

Question of the Day – March 4, 2011

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: I have a client who is a non-spouse beneficiary of an IRA.  If the client elects to stretch the IRA distributions based on life expectancy, how does that work?

Answer: The younger the named beneficiary at the time of the account owner’s death, the longer the distributions and taxes can be stretched.

To calculate the required minimum distributions for a non-spouse beneficiary of an IRA, the RMD divisor must first be determined.  The RMD divisor for the beneficiary is calculated as follows:

Determine the designated beneficiary’s life expectancy using the beneficiary’s age at the end of the calendar year following the year of the owner’s death using the Single Life Table; and in each subsequent year, subtract one year from the number used in the prior year.

The account balance at the end of the prior year is divided by the RMD divisor to determine the RMD for the current year.

Here’s an example.  Say that Son inherits an IRA from Mom.  Before the end of the year after Mom’s death—let’s say it’s 2011—son is age 55.  The table says his life expectancy is 28.6.  That’s the RMD divisor for 2011.  If the account value on 12/31/2010 is $1 million, Son is required to take $34,965 from the account in 2011.

For 2012, Son’s RMD divisor is the 2011 value minus one—that’s 28.6 minus one, or 27.6.  If the account grows back to $1 million by 12/31/2011, the RMD for 2012 is $1 million divided by 27.6 or $36,232.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.