Who?
Beneficiaries of qualified plan participants and traditional IRA participants, as well as non-spouse beneficiaries of Roth IRAs.
Designated beneficiaries may be permitted to stretch payments over their life or life expectancies. Generally, a designated beneficiary is any individual designated as a beneficiary of the IRA. A charity or an estate cannot be considered a designated beneficiary; therefore, distributions may not be stretched. A trust may be a permitted designated beneficiary if the trust meets certain requirements.
Designated beneficiaries are determined as of September 30 of the year after the year of the individual’s death. Any non-individual beneficiaries may be paid out before this deadline to retain stretch opportunities for any remaining designated beneficiaries.
When?
If the individual dies before their RBD, the entire account must be distributed by December 31 of the year that contains the fifth anniversary of the individual’s death, unless they have a designated beneficiary. Distributions to a designated beneficiary may be stretched over the life expectancy of the designated beneficiary as long as the distributions begin no later than December 31 of the year after the year of the individual’s death.
If the individual dies on or after their RBD, RMD regulations allow the account balance to be distributed over the longer of the life expectancy of the designated beneficiary or the life expectancy of the individual.
How?
For non-spouse beneficiaries, the age of the designated beneficiary as of December 31 of the year after the death of the individual is entered into the Single Life Table to determine the appropriate factor to be used to calculate the RMD for that first year. Thereafter, one (1) is subtracted from that original factor each year to determine the RMD (the reduction method).
If multiple individuals are named as designated beneficiaries, the age of the oldest is used to calculate RMDs. If an IRA with multiple individual designated beneficiaries is split into separate accounts by December 31 of the year after the year of death, then the life expectancy of the oldest beneficiary on each account is used.
Example: Bill died in 2018 at age 69. His son Jon was his designated beneficiary on his IRA. He turned 45 in 2019. Thus, Jon’s RMD for 2019 was determined by dividing the account balance in the IRA as of December 31, 2018, by the single life factor of 38.8 for a 45-year-old. The RMD for 2020 would be determined by dividing the IRA’s account balance as of December 31, 2019, by 37.8 (38.8 - 1).
In our next blogpost, we will discuss some special rules for surviving spouses.