Wednesday, October 27, 2010

RMDs for a Successor Beneficiary

Before we even get to the RMDs, what exactly is a successor beneficiary? Let’s say that Great-Uncle Scott dies and leaves his IRA to his daughter Rosemary. Rosemary is the IRA beneficiary. Rosemary names her nephew James as her “successor” beneficiary. If Rosemary dies with funds remaining in her inherited IRA, then James will succeed to her remaining benefit - he becomes the successor beneficiary.

Great-Uncle Scott calculates his RMDs using his age and the Uniform Lifetime Table. At his death, his beneficiary, Rosemary, calculates her RMDs using her life expectancy and the Single Life Table. Once her life expectancy factor is determined, she then subtracts one from that number each year to determine her current factor. If she takes only RMDs from the account, it will be totally paid out at the end of her life expectancy term. At her death before the end of that term, James succeeds to her benefit (the remaining IRA balance). He also inherits her remaining life expectancy. James does not get to use his own life expectancy. He must continue to use Rosemary’s factor and subtract one each year.

This ensures that the IRA gets paid out, and the government collects the taxes due, in a reasonable amount of time. After all, this is not James’ retirement account set up for his retirement; this account was set up for Great-Uncle Scott’s retirement.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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