Before moving ahead on
, I've got to quickly weigh in on Jack Bogle's mandatory retirement from the board of the
. I have been fortunate enough to be on
with Jack, and I've chatted with him a few times. The man is ageless, regardless of what his body does. Fortunately, his wisdom will doubtless continue to provide oversight and leadership in the mutual field arena, no matter what happens at Vanguard. If the Vanguard board continues to focus on form over substance, it will create a questionable precedent for its future and Vanguard's investors. In the meantime, Jack Bogle's legacy remains timeless. The message to Vanguard: Rethink the obvious.
Now back to IRAs. Thank you again for all your email. It was insightful, challenging and stimulating! Next week, I will devote the entire column to your questions. A few of you asked for the name of that 600-page book on IRAs I mentioned
last week. It's
Individual Retirement Account Answer Book
by Donald R. Levy et al. (Aspen Publishers).
Today we'll look at what happens to an IRA before and after the owner dies.
Owner Dies Before Distributions Begin
If the owner dies before the required beginning date for distributions, several possibilities exist.
If there is no designated beneficiary:
The five-year rule would apply. That means all IRA benefits would be paid in full to the estate, or perhaps a charity or trust, by the end of the fifth calendar year following the owner's death. Distributions are taxable during those five years, and anything left at the end must be distributed and is fully taxable.
If the designated beneficiary is a spouse:
The spouse could elect to spread distributions over his or her life expectancy. Distributions must begin by Dec. 31 of the calendar year
the year of the owner's death. The spouse can always choose to recalculate when he or she begins taking distributions. (For more on the recalculation, see my Aug. 11
The spouse can elect to defer the beginning of payments until Dec. 31 of the calendar year the IRA owner would have reached age 70 1/2. This allows the spouse to "step into the shoes" of the IRA owner. In other words, she can do what he would have done.
The spouse can roll over the owner's benefit into an IRA, choose a beneficiary and start required minimum distributions at his or her own required beginning date.
Finally, the spouse can simply treat the owner's IRA as if it were his or her own. Distributions would begin at the surviving spouse's required beginning date.
If the designated beneficiary is not a spouse:
The beneficiary can stretch out payments by using his or her own life expectancy to calculate required minimum distributions. Distributions must begin by Dec. 31 of the calendar year, after the year of the owner's death; otherwise, the five-year rule applies.
If the beneficiary is more than 10 years younger, she could choose to take payments over her own life expectancy, which would stretch payments out over a greater time period. This is a more liberal standard than the one that applies while the IRA owner is still alive. In that case, the age difference between the owner and designated beneficiary is a maximum of 10 years when calculating joint life expectancies for a required distribution.
If multiple beneficiaries are designated:
The age of the oldest beneficiary (with the shortest life expectancy) is used for determining required minimum distributions.
After the owner's death, the IRA can be split into two or more IRAs. But the required minimum distribution will still be based on the life expectancy of the oldest beneficiary. But if the IRA was split
the owner's death, each designated beneficiary would be able to use his or her own life expectancy for calculating required minimum distributions. Obviously, planning pays off.
Owner Dies After Distributions Begin
Here are the possibilities for when the owner dies
he or she is required to begin taking distributions and the spouse is the designated beneficiary.
If both spouses elected not to recalculate life expectancies:
Distributions continue as if the IRA owner had not died. The spouse receives benefits over the remaining term of what had been the owner's life expectancy. At the spouse's death, the contingent beneficiaries -- those beneficiaries next in line -- would receive the benefits over the remaining term of what had been the owner's life expectancy.
Or the spouse can treat the IRA as a rollover to his or her own IRA and name a new beneficiary.
If the IRA owner elected to recalculate and the spouse elected not to recalculate:
At the owner's death, the benefits would be paid based on the spouse's life expectancy. Or the spouse can treat the IRA as his or her own or roll it over and name a new beneficiary.
At the spouse's death the benefits are paid over the remaining term of what had been the spouse's life expectancy.
If both spouses elected to recalculate:
The spouse continues to receive benefits based on his or her life expectancy. Or the spouse can treat the IRA as his or her own, or roll it over and name a new beneficiary.
At the spouse's death, the contingent beneficiaries must receive the balance of the IRA by Dec. 31 of the year following the spouse's death.
If the spouse elected to recalculate and the IRA owner elected not to recalculate:
At the IRA owner's death, distributions continue as if the IRA owner had not died. Or the spouse can treat the IRA as his or her own or roll it over and name a new beneficiary.
At the spouse's death, contingent beneficiaries receive benefits over the remaining term of what had been the IRA owner's life expectancy.
As you can see, planning for distributions of IRAs while alive or after death can be extremely complicated. I have tried to simplify it as much as possible, but it is not very simple. You probably need to discuss your options with a specialist.
There are a lot of details I could not cover in this series. You should also always read your IRA plan document -- the paperwork that names your beneficiaries and establishes the terms of distribution. This document has the final say as to what happens, and you want it to be consistent with your objectives.
Next week, I'll do a question-and-answer format with you. Please send any further questions you have to
Thanks and have a great week!
Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at