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Under the proposed new
rules, the IRA can be
distributed ratably over
the 10 years, or it can be
distributed all in year 1, all in
year 10 or any other pattern
during the 10-year period.
If distributed in year 1, day 1, the beneficiary would have
$1 million of includible income with $0 left in the IRA.
If the distribution occurs in the last day of year 10, at
6% growth with no prior distributions, the IRA would be
worth $1,790,848. This would be fully taxable in year 10,
and the remaining value would be $0. It is very clear that
an inherited IRA is much more tax efficient than a 10-year
force out limitation.
Solving the distribution problem
Life insurance strategies, as discussed below, can remedy
this income bunching problem and replicate the inherited
IRA scenario.
The RMD method
The annual payment for each year is determined by dividing:
The account balance for that year, by
The number from the chosen life expectancy table for
that year
Under the RMD method, the account balance, the number
from the chosen life expectancy table, and the resulting annual
payments, are redetermined for each year.
The fixed amortization method
The annual payment for each year is determined by amortizing
in level amounts the account balance over a specified number
of years, determined using:
The chosen life expectancy table
The chosen interest rate
Under the fixed amortization method, the number from the
chosen life expectancy table and the resulting annual payment
are determined once for the first distribution year, and the
annual payment is the same amount in each succeeding year.
The fixed annuitization method
The annual payment for each year is determined by dividing:
The account balance, by
An annuity factor that is the present value of an annuity of
$1 per year, beginning at the taxpayer’s age and continuing
for the life of the taxpayer (or for the joint lives of the
individual and beneficiary). The annuity factor is derived
using the mortality table in Rev Rul 2002-62, Appendix B,
and the chosen interest rate.
Under the fixed annuitization method, the account balance, the
annuity factor, the chosen interest rate, and the resulting annual
payment are determined once for the distribution year, and the
annual payment is the same amount in each succeeding year.
Summary: Distribution strategy
The basic idea in developing a strategy to replicate the
“inherited IRA” is to start taking distributions as soon as
possible from the IRA.
If the participant is separated from service and is under
age 59½, then this is accomplished by “substantially equal
periodic payments.”
If the participant is age 59½ to 70½, any amount can be
taken out — and the sooner the better.
If the participant is over 70½, then the participant wants
to take distributions in excess of RMDs.
If it is an inherited IRA subject to the 10-year rule, the
idea is to take distributions earlier in the 10-year period,
rather than waiting.
The Secure Act continued on page 26