Required Minimum Distributions: Calculations under the Final Regulations

by Patrick Matthews
© 2002, Brentmark Software, Inc. All Rights Reserved.

After more than a decade of proposed regulations, final minimum distribution regulations were published on April 17, 2002. These new rules are based primarily on the proposed regulations of 2001, but they do add some new calculation wrinkles to consider.

As with the 2001 proposed regulations, the final regulations keep the basic calculation intact. Each year, the distribution is calculated by dividing the previous year’s ending balance by a life expectancy number. The calculation complexity lies in determining the life expectancy number.

Here’s how the new rules work:

Situation I: Owner still alive

If the owner is still alive, the life expectancy is taken straight from the Uniform Lifetime Table. Simply find the owner’s age on the table (it covers ages 70 through 115), and use the life expectancy listed. For this situation, the only change caused by the 2002 final regulations was to update the numbers in the Uniform Lifetime Table.

Prior to 2001, the Uniform Lifetime Table was known as the MDIB table, and was used only for nonspousal beneficiaries. Now, it is used whenever the owner is alive, making the distribution calculation very straightforward. There is only one exception to this rule: cases involving spousal beneficiaries who are more than ten years younger than the owner. In that case, the joint life expectancy of the owner and spouse is used. Once the owner dies, this exception no longer applies, and Situation 4 (see below) applies.

Situation 2: Owner dies with no beneficiary

In the year of death, the minimum distribution is still calculated according to Situation 1 (above). It’s only in the years after the owner’s death that this situation applies.

If the owner dies before the required beginning date, and there is no beneficiary alive as of the owner’s death, the five year rule applies – all the money has to be distributed within five years of the year the owner died.

If the owner dies on or after the required beginning date, and there is no beneficiary alive as of the date of death, distributions after the owner’s death are taken over a term based on the owner’s life expectancy in the year of death. This calculation is easier than it sounds. For the year after death, subtract one from the owner’s single life expectancy in the year of death. As each year passes, reduce the life expectancy by one. For example, if the owner died in 2003, the distribution in 2004 would be based on the owner’s 2003 life expectancy minus one.

The new life expectancy tables used by the 2002 final regulations add some complexity to cases where the owner has already died. If distributions are being taken under this scenario, the length of the term has to be recalculated using the 2002 single life expectancy table. For example, if a plan owner died in 1995, the 2003 distribution would be based on the owner’s life expectancy (using the new table) in 1995 reduced by 8.

Under the 2001 proposed regulations, the beneficiary had to be alive as of 12/31 of the year following the owner’s death to be considered valid. Under the 2002 regulations, the beneficiary only has to be alive when the owner dies to be considered.

Situation 3: Owner dies with nonspousal beneficiary

In the year of death, the minimum distribution is still calculated according to Situation 1 (above). It’s only in the years after the owner’s death that this situation applies.

When the owner dies with a nonspousal beneficiary, a term certain distribution period is established based on the designated beneficiary’s single life expectancy in the year after the owner’s death. Unlike Situation 2, in this case the term is based on a life expectancy calculated in the year after the owner’s death, rather than the year of death. For example, if the owner died in 2003, the life expectancy used as the divisor in 2004 would be the beneficiary’s single life expectancy in 2004. In 2005, the divisor used would be 2004’s number minus 1. The life expectancy in the year after death is, of course, calculated using the new single life expectancy table, and, as with Situation 2, an existing term certain would have to be recalculated using the new table.

The 2002 final regulations add another wrinkle to those situations when the owner died on or after the required beginning date. In these situations, the life expectancy used is the greater of the one calculated using the "no beneficiary" case (situation 2), and the one resulting from the calculation described in the previous paragraph. This can get a little confusing, because the "no beneficiary" case starts with a term calculated in the year of death, while the nonspousal beneficiary’s term certain starts the year after the owner’s death.

Situation 4: Owner dies with spousal beneficiary

In the year of death, the minimum distribution is still calculated according to Situation 1 (above). It’s only in the years after the owner’s death that this situation applies.

When the owner dies with a spousal beneficiary, the spouse gets special treatment. In this case, the distributions are based on the spouse’s single life expectancy recalculated each year after the owner’s death. If the owner dies prior to the calendar year in which he would have reached age 70½, the spouse does not have to start taking distributions until that year. Upon the spouse’s death, the distributions become term certain, with the term set to the spouse’s life expectancy in the year of death. This works the same as the old term certain method, with the life expectancy being reduced by one for each year that passes after the spouse’s death.

As with situation 3, the 2002 final regulations add more complexity. For cases where the client dies on or after the required beginning date, the life expectancy used is the greater of the one calculated using the "no beneficiary" case (situation 2), and the one resulting from the calculation described in the previous paragraph.

When do these apply?

In 2002, there is the option of using either the pre-2001 proposed regulations (with all their calculation and recalculation options), the 2001 proposed regulations, and the 2002 final regulations. After 2002, only the 2002 final regulations may be used.

The 2002 final regulations added more than just a new mortality table to these calculations. They also added complexity. When all the different situations listed above are taken together, they represent a fairly complicated set of calculations which have to be correctly performed to make sure you calculate the correct distribution for your clients.

For the latest information on Required Minimum Distributions, see the NewRMD.Com Web Site at www.newrmd.com.


Patrick Matthews was the Director of Software Development at Brentmark Software, Inc.  He is the founder of Live Oak Games.


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Last modified: September 02, 2008