November 20, 2014

Life-Expectancy Rule

Your Guide

Definition

A rule under which beneficiaries with inherited retirement accounts ( inherited IRAs and employer sponsored retirement plans), must take their required minimum distributions over the applicable life-expectancy.

The life-expectancy can be that of the beneficiary or the deceased retirement account owner.

Referring Cite

IRC. §401(a)(9)

Additional Helpful Information

  • If the retirement account owner dies before the required beginning date (RBD), distributions can be taken under the five-year rule, or the life expectancy rule. If the life-expectancy rule applies, the life expectancy of the beneficiary is used.The life expectancy option is not available to a non-person beneficiary.
  • If the retirement account owner dies on/after the RBD, distributions can be taken under the life expectancy rule. The life expectancy used would be the longer of:
    • the beneficiary’s life expectancy, or
    • the remaining life expectancy of the deceased retirement account owner.
  • For a non-person beneficiary, the remaining life expectancy of the deceased retirement account owner must be used if the retirement account owner dies on/after the RBD,.
  • More than is required under the life expectancy rule can be withdrawn at any time.

Written By

Retirement Dictionary Staff

Frequently Asked Questions Regarding

The grandchild (son) should take distributions over his mother’s life expectancy. The mother’s life expectancy is determined in the year after the grandfather died, and 1(one) is subtracted for each year that has passed.

A second generation beneficiary’s (or successor beneficiary’s) life expectancy is never used to determine distributions from an inherited retirement account.
The matter of how the account should be titled for a second generation beneficiary (successor beneficiary) is one of those issues which has not yet been addressed. So, I can only give my opinion.
Based on the guidance provided in the instructions for filing IRS Form 1099-R and Form 5498, and IRS Notice 2007-7, the account should be titled “Grandchild beneficiary  of Mother( deceased) IRA”, or any other variation, providing it shows the grandchild is the beneficiary, and the mother is the decedent.
IRS Notice 2007-7 A-13 states that “ The IRA must be established in a manner which identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.” Therefore, since the grandchild is the beneficiary of the mother, the registration should show the mother’s name and the child’s name.
Before notice 2007-7 was issued, I would have been less certain, as the instructions for 1099-R/5498 were not as clear.

If an individual fails to distribute his RMD by the deadline, he will owe the IRS an excess accumulation penalty of 50% of the shortfall. The excise tax is reported on IRS Form 5329 and IRS Form 1040 (your income tax return).

If the client missed the deadline due to a reasonable cause, he may ask the IRS to waive the 50% excise tax, by attaching a letter of explanation to his completed Form 5329. He should include proof that he has taken steps to remedy the issue by withdrawing the amount. Proof of the withdrawal should be included with his request.

 

If the IRS approved his request, he would not need to pay the excess accumulation penalty

There is no official guidance on whether an IRA contribution can be made to a decedent’s IRA (that is, a contribution being made to an individual’s IRA after the individual dies). The only indication of the IRS’ position on this matter is private letter ruling (PLR) 8439066, in which the IRS ruled that the decedent’s estate could not contribute to the decedent’s IRA for the year of death, if the contribution is being made after the individual died. Obviously, had the IRA owner contributed the amount before death, it would have been OK .

The question then becomes, would the contribution be allowed for the previous tax-year if the individual died after the end of the year? Say- January of this year? It appears not. In the same PLR, the IRS stated that “Since the taxpayer is deceased, the contribution made by the decedent’s estate would not be a contribution for retirement purposes”, which suggests that any contribution after death is not allowed.  The IRS goes on to say ( in the PLR) that  “Section 1.408-2(a) of the Income Tax Regulations specifies the person who may establish and maintain an IRA to include an individual, an employer, or an employee association. The regulations do not provide that the decedent’s personal representatives, the decedent’s estate, or beneficiaries of the decedent’s estate can establish or maintain and IRA on behalf of an individual. This is because the primary purpose of the IRA is for retirement.
In sum, the IRS is saying that a deceased person has no need for retirement funds, therefore making additions in the form of contributions to a deceased individual’s IRA is not permitted. They also explained that making such a contribution would create an “excess IRA contribution”, subject to a 6% penalty if not removed from the IRA by the applicable deadline.
A PLR cannot be cited as precedence or legal reference, but gives a good idea of how the IRS would treat a case with a similar fact pattern.

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