Final SECURE 2.0 regulations

 The IRS has finally issued its long-awaited Final Rule implementing the “SECURE 2.0” legislation governing distributions to non-spouse designated beneficiaries of IRAs, 401(k) plans, and similar retirement vehicles. Although this release affects a number of finalized regulations, one of the most important for IRA owners and their families involves the long-uncertain question of whether required minimum distributions (RMDs) will be needed during the 10-year period that applies to “non-eligible designated beneficiaries.” The IRS’s final answer is: If the owner of the account had reached his Required Beginning Date (which usually means he has started taking required distributions), then those distributions must continue during the 10-year period. If he had not, then no RMDs are needed. 

These RMDs will be based on the owner’s life expectancy, not that of the beneficary(ies), under the statutory rule that the distributions must continue “as least as rapidly” as they had been before the death of the owner. 

Recall our earlier posting advising that many non-eligible designated beneficiaries can benefit from a shortened period (six years or so) rather than trying to plan distributions over the entire 10-year period. 

IRA distributions under SECURE

The 2019 SECURE Act made a major modification to post-mortem distributions of funds from IRAs and qualified retirement accounts to non-spouse designated beneficiaries. In most cases, if a designated beneficiary [DB] has been properly named, the funds have to be distributed, and taxed at ordinary income rates, within ten years of the death of the owner of the account. Previously, the funds could be distributed over the life expectancy of the DB. This is a dramatic shortening of the time for distributions, and for larger accounts this will be a significant change. The distribution schedule should be planned carefully. 

Most lawyers and financial advisors appear to assume that the distribution timeline after the death of the account owner should be the maximum ten years. Many, further, simply assume that 10% of the original amount should be distributed each year. That assumption overlooks the fact that the money invested in the account will continue to generate income and to grow in value over time. If the DB were to withdraw 10% of the funds each year for nine years, the IRA would still have, in the tenth year, 57.6% of the original amount that she started with in year 1. 

Our calculations show that the projection over time often justifies a shorter period of approximately six years. There is relatively little difference between the outcome at the end of a six-year period vs. at the end of a ten-year period. 

The calculations shown here assume an IRA worth $100,000 at the time of the owner's death. They also assume an average growth rate of 3% per year. 

The primary benefit of using the alternative six-year period is that the funds that remain after taxes are paid are in the hands of the beneficiary several years sooner. Over the six years, the distributions are made, beginning at 10% and then increasing by 10 percentage points each year thereafter, until year six, when the amount remaining is distributed. Tax is paid on the distributions, at the Federal marginal rate of 22% in most cases, but then the remaining assets are held outside of the IRA container, and they can continue to appreciate, no longer subject to income tax. The cost basis for purposes of calculating long-term capital gains would be the fair market value on the date of distribution.

IRAs from a different perspective

It is not always necessary to accept the oddball ways that Congress and the IRS do things. At our 906LawTech page, we provide an alternative IRA distribution schedule and projection that gets rid of the "divisors" and simply uses percentages for each year's required minimum distribution. 

Resources newly available online

 In July 2020, after nearly 40 years of active, full-time practice, I scaled back to part-time practice. I continue to work about half-time. 

I have spent some time updating and, in some cases, annotating some of the tools that I had been using in my practice, and they have now been posted online at tech.906law.net. With one exception, all are free for anyone to use. They include: 

2021 Tax Calculator (Excel) - There are times that you want to have a projection of what the overall tax burden will be, assuming a certain level of earned income. This calculator will give you that projection. 

IRA Calculator (Excel) - Assuming a specified value for an IRA, 401(k) plan, or other similar retirement plan, this will give you a projection of what the required distributions (RMDs) will be when they begin at age 72, and how the increases in value and drawdowns over the next three decades will affect its overall value. There are two versions included, one that begins at age 72 and another that begins as early as age 60 and tracks increases with or without distributions until the age 72. (Free for personal use, but subject to a $50 licensing fee when used by a planner to advise a client.) 

SECURE distribution calculator (Excel) - For IRAs (etc.) inherited by a designated beneficiary who is not subject to one of four specified exceptions, the amount in the account can no longer be distributed over the beneficiary’s life expectancy, but rather must be distributed over the ten years following the death of the IRA owner (or her surviving spouse in many cases). This calculator again plots out increases in value and drawdowns with yearly or occasional distributions. 

Digital and Online Inventory (Word) - A place to record email accounts, online accounts, web pages, domains, electronic access to bank accounts, investment accounts, credit cards, software registration, etc. with contact information and passwords.  

US LawNet - A directory of the sites and resources most useful to practicing lawyers in the states that it covers. This site had its origin in a personal web page that I developed for my own use in the mid-1990s, and later posted online as a “publicly-accessible private site” as www.michlaw.net. It has now been expanded to include ten states - five Great Lakes states and the five most populous states - and is publicly available for free use.  

Notice from IRS on reversing RMDs from retirement accounts

IRS notice 2020-51 has been released as additional "fine-tuning" of the provision in the CARES Act that excuses required minimum distributions (RMDs) from IRAs and other retirement accounts this year. The notice advises that anyone who had already taken an RMD for 2020 before the law was passed in March will have until August 31, 2020 to restore the funds to the account, and the distribution will be regarded as rescinded. Under the statute and regulations, the "standard" time is limited to 60 days.

Recall that the other important provision of the CARES Act was that anyone, regardless of age, can withdraw up to $100,000 from an IRA if the money is needed due to a Covid-related hardship, and some or all of the money can be restored within three years without the recognition of income. If the owner finds that he is unable to restore all of the money, he will be given three years to pay the income tax due on the distribution.

Incidentally, our experience this year leads to a new recommendation. If you calculate your RMD in January based on the value of the account as of the preceding December 31, you should sell the assets you need to liquidate rather than waiting until later in the year. Most retirement accounts saw values drop by 20-25% in March and April of this year, and if such a drop happens the owner of an IRA can be hard pressed to take the RMD from the remaining funds.

Selected items from the CARES Act

The CARES Act, signed into law by the President on March 28, makes a number of provisions that will be of interest to individuals and businesses. We will not try to describe them all, nor we will provide details on the direct monetary payments coming to families. Those have been well explained by others.

There is a new "above the line" deduction for up to $300 in charitable deductions that can be used by taxpayers who use the standard deduction. Some limits will apply.

The 60% of income limit on charitable contributions by those who itemized their deductions is waived for 2020. If you wish you can give away your entire salary.

Repayment on certain Federal student loans is suspended and no interest will accrue between now and September.

Employers may offer a new before-tax benefit to their employees: They may pay or allow the employee to defer up to $5,250 this year to repay student loans, and that money is not included in the employee's taxable income. This may be more popular than you would think because it would not cost the employer anything to offer this new benefit.

IRA owners have several new benefits.

• Required minimum distributions for 2020 are waived. The first-time RMDs for 2019 that have not yet been made are also waived. 
• Certain owners who are affected by the coronavirus have the option to withdraw up to $100,000 of IRA funds, without being subject to the 10% penalty that would apply if they are under age 59 1/2. As always, the funds that are taken out are taxable, but the tax will not be payable if the funds are repaid to the account within three years, and if they are not repaid the tax payments can be spread over three years. 

The $500,000 limit on net operating losses for businesses has been waived for 2020 and retroactively for 2018 and 2019 as well.

IRS Guidance on the new rules

The IRS has released Notice 2020-6, which provides some early comments on a couple of details on the change in retirement plan distribution rules.

The first provides some relief to custodians who may include erroneous information about the Required Beginning Date when sending a required form to owners.

The other is directed to advisors of those individual IRA and 401-k owners who are right at the age 70-71 boundary. In its typical fashion, this IRS notice tells them:

The SECURE Act did not change the required beginning date for IRA owners who attained age 70-1⁄2 prior to January 1, 2020. In order to reduce misunderstanding among IRA owners, the IRS encourages all financial institutions, in communicating these RMD changes, to remind IRA owners who attained age 70-1⁄2 in 2019, and have not yet taken their 2019 RMDs, that they are still required to take those distributions by April 1, 2020. 

Enter the IRS Translator. What this means in English is: If you were born after June 1948 but before July 1949, your Required Beginning Date is still April 1, 2020 and this will not change.

Your first required distribution, which must be taken by that date, will be for 2019, based on the account value as of December 31, 2018. The 2020 distribution will need to be taken this year as well.

(h/t Kitces)

New distribution rules for inherited retirement accounts

You may have read reports of the SECURE Act passed in December and signed by the President. Most of the changes made in this new legislation relate to creating new employer-sponsored retirement accounts - allowing employers to combine to offer new plans to their employees.

Three of the new provisions are very important for the owners of existing IRAs and other retirement accounts:

• The “required beginning date” on which the owner of the account must begin taking required distributions from the account is now April 1 after the year he or she reaches age 72, an extension of one to two years. 
• The prohibition on contributing to an IRA after the owner must begin taking required distributions has now been removed. 
• The money that is left in the account after the death of the owner or (in many cases) the owner's spouse must now be distributed to the designated non-spouse beneficiary within ten years of the death. Those distributions are taxable income. The previous preferred option of taking those funds out over that beneficiary’s life expectancy has been removed. 

For the owners of sizable retirement accounts (more than $100,000-200,000 or so per designated beneficiary) there are some trust-based options that we can discuss, particularly for those beneficiaries who would have trouble managing money for themselves. These would not avoid the tax but they would assist in the preservation and management of the funds that remain.

Using retirement funds pre-retirement

It is common wisdom among estate planners and commenters on financial matters that people between the age of 60 and 70 should not touch their retirement accounts until they are required to do so, and that those who have reached the point at which they must take required distributions (around age 71) should take only the required minimum distributions (RMDs). While this is good thinking for many people, it will not work for everyone. 

The common recommendation no doubt arises from the assumption that most clients have a sizable retirement account and a sizable investment account comprised of non-retirement assets. The recommendation is based on the fact that non-retirement funds consist of money on which tax has already been paid, and thus using that money will not result in the recognition of income and the imposition of additional tax based on that income. 

But a client who has a very large retirement account and whose other assets are modest may benefit from a bit more liberal thinking about the use of the retirement funds. 

Let us do a bit of calculating for a moment. Let’s begin by assuming a client who 60 and who has exactly $100,000 in retirement funds. We know that 

• His RMDs will begin in about 10 years. 
• His accounts are likely to grow to about $138,000 in that time, assuming no additional contributions are made. 
• His RMD for the first year, often his age 71 year, will be $5,223. 

A $5,000 annual distribution is of course not much. 

These calculations do “scale” perfectly, though. If we change one assumption, considering a retirement account with a current value of $1 million, it will change the following parameters. 

• His accounts are likely to grow to about $1,380,000 in that time, assuming no additional contributions are made. 
• His RMD for the first year, his age 71 year, will be $52,230. 

Now we are talking about a significant required minimum distribution. 

Let’s say that our client decides that he wishes to use the money to enhance his quality of life during the next ten years. Each year, he wants to use $7,500 of his accounts (probably netting about $6,000 after taxes) to do some traveling with his wife. What is the result? 

When he reaches age 71, he finds that 

• His total retirement account is $1.3 million, or about $80,000 less than it would have been if he had not touched the money. 
• His initial RMD is $49,000, or about $3,200 less than it would have otherwise been. Each successive RMD is also moderately smaller than it otherwise would have been. 

The differences, in all honesty, are not that great. And there is a real-life factor that seems to elude many who comment in this field. In general, our client is likely to be much better able to travel and get around in his 60s than he will in his 70s. The ability to use his money to travel and in general to enhance the lives of both spouses is likely to be greater in their 60s. In general, the money will be more useful to them in those years than it will be when they are 75, 80 or 85 years old. 

Update 12-7-18 - A user at Quora posted this in response to a question: 

I took my pension at 60 and get less than I would have if I had waited until I was 65. However, I got to enjoy retirement between 60 and 65 when my health was good and I could do pretty much anything I wanted to.
Retirement is much less enjoyable when your health is failing. Your eyesight goes so you can’t read or drive any more. Your joints start to ache so sports are less enjoyable. Out of country health insurance costs a lot more so travel is more expensive.
I personally recommend retiring as soon as you can and do as much as you can while you have your health. Living in retirement is a lot less expensive than most people think. I’m very glad I retired when I did.

IRS discontinues MyRA

The MyRA program that we described in our November 2015 post has now been cancelled by the IRS, citing "extremely low" participation by taxpayers.

Expected changes to inherited IRAs

Included in the Retirement Enhancement and Savings Act introduced last year is a proposal to modify the ability of a non-spouse designated beneficiary of an IRA or other retirement account to take mandatory distributions, after the death of the participant (the worker whose earnings originally funded the account), over a "stretch" period based on the life expectancy of that beneficiary.

This idea has been raised, in one form or another, several times in the past few years, by Federal officials eager to accelerate the release of these funds as distributions of ordinary income that will generate tax revenue. Most of the proposals made by the outgoing Obama administration had called for the outright elimination of the "stretch" distribution for all funds payable to a non-spouse beneficiary.

This more recent proposal offers more of a compromise. It would provide:

• The current right of the spouse of the participant to treat the account as his or her own after the participant's death to remain unchanged.   
• The current ability of a non-spouse beneficiary to take distributions from the account based on his or her own life expectancy to remain in effect for the first $450,000 in all accounts owned by him. 
• For amounts over $450,000, they are to be subject to a much faster distribution schedule. All such funds must be distributed, as ordinary income, within five years after the participant has died. 

On request, we can provide a model payout schedule that will demonstrate, for a given set of retirement accounts, how this proposal would affect distributions.

Knowledgeable observers expect that this proposal or something close to it has a good chance of passing in 2017. At this point, the bill has been approved by the Senate Finance Committee. There are still several steps needed before it is passed and enacted.

How much additional revenue this proposal would generate is uncertain. Commentators familiar with the issue have pointed out that most non-spouse beneficiaries do not leave the funds in place to continue to grow over the "stretch" period. Most, they say, take the money out, pay the tax on it, and spend it.

Recheck your beneficiary designations

Most people who have money in tax-deferred retirement accounts such as IRAs or 401-k plans know that it is important to name a designated beneficiary (DB) and a contingent beneficiary (CB) for those plans. The Federal statutes that govern these plans provide:

• The account will be payable to the DB and can be paid out over the DB's life expectancy.
• The account will be payable to the CB in the same fashion if the DB dies before the owner of the account.
• If there is no DB or CB, the account is payable as the plan documents direct, and that may be to the estate of the owner.
• If there is no proper DB/CB, the entire amount in the account must be distributed, as taxable income, within five years of the owner's death.
• The owner's spouse must be the DB for "qualified" retirement plans, including 401-k plans, unless that right is specifically waived in writing.

We always recommend that the designations be reviewed in the event of any major life change, such as marriage, divorce, death, or retirement.

It is also a good idea to check the designations every year or two, even if no life change has occurred, to ensure that what was previously designated remains in place. We frequently hear about accounts for which a DB and CB were properly designated but for which the custodian has, for whatever reason, lost track of the designation. The owner of the account can correct such errors while he is alive. The family members who are disappointed after he dies cannot do so.

Inherited IRAs not protected

The U.S. Supreme Court has ruled, in the case of Clark v. Rameker, that inherited IRAs cannot be protected in a bankruptcy filing. As a result, IRAs that have been inherited from a deceased worker (the "participant") are available as assets to pay creditors.

The opinion for a unanimous court, written by Justice Sotomayor, focuses on key differences between IRAs owned by the participant and inherited IRAs:

"Inherited IRAs do not operate like ordinary IRAs. Un­like with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, with­out paying a tax penalty. §72(t)(2)(A)(ii). Indeed, the owner of an inherited IRA not only may but must with­draw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. . . And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make con­tributions to the account. 26 U. S. C. §219(d)(4)."

The code, she noted, does not define the term "retirement funds." Considering the ordinary meaning of the term (a Scalia-like endeavor, it would seem), it would mean funds set aside for the owner's retirement. Disregarding a particular owner's subjective intention, and focusing on the objective characteristics, she noted three factors:

"Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objec­tively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. . .  

"Second, holders of inherited IRAs are required to with­ draw money from such accounts, no matter how many years they may be from retirement. . .  

"Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty. . . "

IRAs that are owned by the participant continue to be protected to the extent provided by Federal or state law. (Both must be considered under the Bankruptcy Code.) In Michigan, that law is MCL 600.5451-1-k. Qualified retirement plans, including 401-k plans, are exempted under MCL 600.5451-1-l and under provisions of Federal law.

The Feds and inherited IRAs

The proposal originally made a couple of years ago by Sen. Max Baucus of Montana to severely restrict inherited IRAs has re-emerged in the bill currently under consideration to extend interest rates on Federally subsidized student loans. The bill passed by a vote of 51-49, which is not enough to overcome a filibuster under the Senate's rules. (See the recent article in Forbes magazine.)

What this means for IRA owners is that the Federal government is continuing to cast its covetous eyes on money that is being held in tax-free accounts.

Traditional IRAs are accounts created with before-tax money and in which the funds may grow tax-free until they are distributed, but when funds are distributed from an ordinary IRA to the owner (called the "participant"), they are taxed as ordinary income. Until that distribution takes place, the Federal government does not get any revenue from the account. That delay is what irks some of our lawmakers.

When the participant dies, assuming that he is not survived by a spouse, his designated beneficiary will begin to take required annual distributions based on his or her life expectancy, again as ordinary income. For a young beneficiary, this can result in a "stretch" over several decades, a very favorable result.

The Baucus proposal is to remove that favorable treatment in the hands of the beneficiary and instead require that the beneficiary take all funds from the account, as taxable income, within five years of the death of the participant.

We can expect that this proposal will continue to resurface from time to time. Ultimately, we may see some form of it adopted for large inherited IRAs, perhaps those with assets over $10 million or $5 million.

Federal credit for IRA contributions

If your annual income is more than about $10,000 but less than $28,750 (single) or $57,500 (married filing jointly), the U.S. Government will give you up to $1,000 per year to help defray your retirement contributions. Here's how.

Congress adopted the "savers credit" in order to encourage people to contribute to retirement plans. If your employer offers a retirement account that you contribute to (such as a 401k plan), your contributions are eligible. If not, you can make the contributions to a separate IRA.

Under this plan, you can claim up to 50% of your retirement contributions as a credit against your Federal tax liability, up to $1,000 based on a contribution of $2,000. The full 50% is available to persons with an adjusted gross income under $16,750 single / $33,500 married filing jointly. At higher levels of income, the credit is reduced.

Unlike a deduction, which reduces income and thus partially reduces taxes, a credit is a full offset of a tax liability. If the government gives you a tax credit for a particular activity, this means that the government is paying for it fully, with money you would otherwise have to send to the IRS. This applies even if you get a refund at tax time.

This is a nonrefundable credit, meaning that you will have to have a tax liability that this credit will offset. It is not available to those who will pay no taxes - i.e., single people whose income is less than about $9,700. And the largest credit, 50% of contributions up to $2,000, is available only to persons whose income is quite low - $17,250 for a single person. Of course, someone making that little is very unlikely to be willing, or able, to direct as much as $2,000 to a retirement account.

Those making between $17,250 and $28,750 will be able to claim a credit of only $200-400 based on a $2,000 contribution.

See IRS Publication 590, page 79, for more information.

IRA distribution flowchart

This flowchart (PDF) is a handy reference for the rules that relate to distributions from IRAs to the owner (participant) and to beneficiaries.

New IRA proposal

Reuters reports that the Obama Administration's proposed 2013 budget includes a new provision for distribution from IRAs. If all accounts owned by the participant hold less than $75,000, he will not be required to take mandatory distributions even after the age of 70. Of course, many will take distributions because they need to, but if they have the option, they will be permitted to forgo the distribution. Ultimately, this will allow them to leave more to their designated beneficiaries. The beneficiaries (other than the spouse) will have to begin taking distributions beginning the year after the participant's death, as is currently the case.

Senator wants to raid inherited IRAs

Bloomberg reports that Sen. Max Baucus (D-Mont), chair of the Finance Committee, has proposed requiring that inherited IRAs and retirement accounts be paid out to beneficiaries within five years of the death of the participant. This would generate something in the neighborhood of $4.6 billion for the U.S. Treasury. Under current law, an IRA that is inherited by a properly-named designated beneficiary (other than the spouse) is usually paid out over the life expectancy of the beneficiary, a benefit that can significantly delay mandatory distributions of taxable income. Sen. Baucus, mischaracterizing the system that Congress created and that has been in place for many years, complains that beneficiaries are "abusing" the system by delaying distributions.  "They’re being used by some taxpayers to give tax-free benefits," he is quoted as saying. Tax-deferred, Senator, not tax-free. The money will be paid out, and tax will be paid.

Reports soon arose that Sen. Baucus was "backing off" a little bit on his proposal, but we can expect that legislators will continue to cast covetous glances at the accounts that are building wealth by keeping money out of the hands of the tax man for extended periods of time.

Update Feb 22: AdvisorOne reports that the provision, added by Sen. Baucus on February 7 during committee markup, remains in the bill. So much for backing off. The Financial Services Institute is "mobilizing" its members to press for the removal of this provision.

Case report: IRAs and money judgments

We have previously noted on this page that Michigan has a statute which exempts funds held in an IRA from execution on a money judgment entered against the IRA owner. On November 1, 2011, the Michigan Court of Appeals, in the unpublished case of Vinyl Tech Window Systems, Inc. v. Blodgett, held that this statute did not protect several IRAs owned by the defendants, and ordered the release of the funds in execution on a judgment. It thus upheld the ruling of the circuit court.

In conformance with the principle that "hard cases make bad law", the circuit court's ruling and reasoning were quite clumsy and difficult to decipher. The facts of the case were particularly egregious. Blodgett, who worked for Vinyl Tech as its comptroller, had embezzled large sums of money and diverted the funds to a company owned by her husband. The circuit court entered a judgment in favor of the employer in the amount of $1.72 million against Blodgett, her husband, and his company.

The circuit court opinion indicates that the husband had created a number of IRAs through some form of trust arrangement. It appears but probably was never proven that most of the funds ending up in the IRAs originated from the embezzled funds. It also appears that the circuit court had entered an early order freezing the funds held by the defendants; it noted that the creation of the IRAs had been done in violation of its order.

In its opinion, the Court of Appeals noted an early Michigan case, Long v. Earle, 277 Mich 505, 511-512 (1936), in which the Michigan Supreme Court had held that, despite the statutory homestead exemption from execution on judgment, one cannot embezzle money, buy a homestead with the proceeds, and then try to claim the exemption.

The problem in applying the Long case here may well have been the uncertainty whether the funds used to fund the IRAs were traceable to the embezzled funds. Since the embezzlement had gone on for many years, it is likely that that had been the case, but it does not appear that the plaintiffs were able to establish that that had occurred.

Rather than accept some of the questionable rationales pronounced by the circuit court, the Court of Appeals upheld its decision based on the defendants' failure to cooperate with a number of post-trial proceedings. They did not respond to discovery requests, they failed to appear for a creditors' examination, and they tried to prevent the discovery of assets that had been transferred to relatives. As a result of this behavior, the Court ruled, they had failed to meet their burden of proof of demonstrating that they were entitled to the exemption. The order that the funds be paid over to the judgment creditors was upheld.

Full text of case (PDF)

I just inherited an IRA. Now what?

A designated beneficiary of an IRA has a couple of choices to make regarding distributions from the account, but most of the provisions of the law are mandatory. As always, unless it is a Roth IRA, distributions from the account are taxed as ordinary income. Unless a spouse inherits the account, mandatory annual distributions must begin by December 31 of the year after the death of the IRA owner.

The words and phrases that we use are defined as follows:

• The participant is the original owner of the IRA, the person whose earnings were contributed while working.
• The designated beneficiary (DB) is a person who has been properly named on the account. The DB must be a natural person or, if properly designed, a trust.
• The contingent beneficiary is a person who has been named as such. If the DB predeceases the participant, the person named as contingent beneficiary succeeds and has the rights of the DB as described below. Note that the contingent beneficiary has no interest in the account if the DB dies after the participant.
• The life expectancy of a participant or beneficiary is calculated using formulas and tables that the IRS has devised for this purpose.
• The required beginning date is the date by which the participant is required to begin taking distributions from the account. It is defined as April 1 of the year after the participant "reaches age 70½".

The "stretch" effect, the ability to delay mandatory distributions of taxable income and allow the principal to continue to grow tax-free, is available to the successor of a participant under age 70 only if he was properly named as a DB by the participant. (A 50-year-old DB of an IRA worth $100,000 is required to take a distribution of $3,021, for example. The required distribution to a 20-year-old DB would be less than $2,000.)

If the DB is the spouse of the deceased participant, he may elect to convert the account to his own name. If he does so, then his required beginning date and his life expectancy will apply. He will not have to take mandatory distributions until after he reaches age 70.

If the DB is a non-spouse, the rules are:

1. If the participant had not reached his required beginning date before his death, the custodian of the account must begin making annual distributions based on the life expectancy of the DB.

• If there are two or more people named as DB, the life expectancy of the oldest must be used. Alternatively, the account may be divided into two or more separate accounts, and the separate life expectancy of each will govern his part.
• Dividing the account is a way to keep the ability to stretch out distributions if a charity has been named as one beneficiary. There is a time limit for doing this.

2. If the participant had already reached the date on which he was required to begin taking distributions, then the distributions to a DB will also be based on that DB's life expectancy. (If the non-spouse DB was older than the participant, though, distributions will continue based on the participant's life expectancy.) If there is no DB, the distributions will continue on the same schedule that applied to the participant, using his life expectancy.

If the participant had not taken his required distribution for the year he died, it must be taken by December 31 of that year. It is taken by the beneficiary, not by the participant's estate.

The DB should always take steps to name his own beneficiary of the account and a contingent beneficiary. This person may not be a "designated beneficiary", as that term is used under the statute and regulations, but if not, he or should would continue the schedule of distributions that the DB had started.

If there was no DB on the account, such as a situation where the account is payable to the estate of the participant, the "stretch" is lost. A shortened payout period applies if the participant had not reached his required beginning date: the funds have to be distributed in full within five years of the participant's death to the person(s) entitled to them. If he had reached his required beginning date, however, the distributions may continue based on his life expectancy.

More: The Zucker Law Firm discusses the Five Options available to beneficiaries