IRA withdrawals may begin at age 55½ without penalty and must begin by age 70½, which is the “Required Beginning Date” (“RBD”). A rule of administrative convenience permits individuals who turn 70½ in a given year to defer distributions until April 1 of the following year.  However, in that case a second distribution would be required by December 31 of the same year.

Once the RBD arrives, the tax-free ride is over: the owner may distribute the entire IRA but must take at least the minimum required distribution (“MRD”). If an insufficient distribution is made, or if no distribution is made, a 50% excise tax is imposed on the difference between the MRD and the actual distribution.

The MRD is itself a function of the amount of the IRA on December 31 of the preceding year, and the owner’s life expectancy. If a designated beneficiary (who takes nothing until the owner dies) is named, the MRD may be based on a joint and survivor life expectancy. Naming a designated beneficiary after the RBD will have legal but not tax significance — the MRD will still be based on the life expectancy of the owner alone. Naming multiple designated beneficiaries before the RBD is permissible, but the payout will be determined by the joint and survivor life expectancy of the owner and the oldest designated beneficiary. Similarly, a beneficiary designation may be changed after the RBD, but the MRD will be calculated based on the original beneficiary designation. It is therefore critical that a designated beneficiary must be named before the RBD if the longest payout period is desired.

In order to prevent excessive deferrals during the owner’s lifetime after the RBD, the Code provides that a non-spouse beneficiary is deemed to be no more than ten years younger than the owner for purposes of calculating their joint life expectancy. However, after the owner dies, the true life expectancy of the beneficiary may be used to redetermine the MRD.

The life expectancy of the IRA owner and designated beneficiary, if there is one, may be calculated in either of two ways:

¶    Under the “term certain” method, the initial life expectancy of the owner and the designated beneficiary (if named) are reduced by one year in each succeeding year. If the owner dies after the RBD having failed to name a designated beneficiary, the heirs may continue to receive distributions based on the life expectancy of the owner prior to his death. The principal disadvantage of the term certain method is that IRA benefits will expire in a fixed number of years, regardless of whether the owner and spouse are still alive. This could result in hardship.

¶  Under the “recalculation” method, the life expectancy is recalculated each year. Compared to the term certain method, the recalculation method will result in longer payouts (and lower MRDs) because the life expectancy of a person 80½ years of age is considerably higher than the life expectancy of a person 70½, reduced by ten years.  (Note: If the designated beneficiary is the spouse, then she may also recalculate her life expectancy each year for purposes of determining the joint life expectancy. However, the life expectancy a non-spouse beneficiary must be calculated using the term certain method.)

Although the recalculation method appears attractive, certain risks inhere: First, if no designated beneficiary has been named by the RBD, the recalculated life expectancy of an owner who dies after the RBD is zero. Consequently, the heirs would be required to liquidate the IRA at the owner’s death; and second, even if a spouse has been named designated beneficiary, the death of the owner during the payout period will result in the MRD being based on the spouse’s recalculated life expectancy, which would be less than the joint life expectancy calculated under the term certain method. Fortunately, the Code permits the owner and designated beneficiary to utilize different methods, which will result in a longer payout than if both had chosen the term certain method.

The death of the owner prior to the RBD must also be considered. In that event, the designated beneficiary may take distributions over the owner’s life expectancy, beginning in the year of the owner’s death. If the designated beneficiary is also the owner’s spouse, the rules are more liberal: she need not take distributions until the owner would have turned 70½. The spouse may also convert the IRA to her own, in which case she could take distributions based on her own RBD, and could also name her own beneficiaries.