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Suppose that the owner of an IRA or company plan dies before his or her RBD without naming a designated beneficiary?

The beneficiaries must then withdraw from the account under the five-year rule. And it does not matter how much they take out during the five-year-rule period, as long as the account is depleted by December 31 of the fifth year after owner’s death. Any balance remaining is subject to the 50% penalty.

On the other hand, if an account owner dies after the RBD and has no designated beneficiary, then the distribution period is the owner’s life expectancy calculated in the year of death, reduced by one for each subsequent year.

The longest possible distribution period for the IRA would then be 15.3 years. For an IRA owner, the RBD is April 1st of the year after he or she turns 70½, which always falls in the second required distribution year. If the owner turned 70½ years old in 2004, then the first distribution year is 2004, but the RBD is April 1, 2005, which is in the second distribution year. Death before that date means that the owner died before reaching his RBD, even if he or she had already taken a required distribution.

If the IRA owner has passed the RBD and there is no designated beneficiary, the IRA can be paid out over the remaining single life expectancy of the deceased IRA owner. The longest possible single life expectancy of an IRA owner who has passed his RBD is 16.3 years. That’s the life expectancy of a 71-year old.

Distributions to the beneficiary must begin in the year after the IRA owner’s death and the factor is reduced by one each year, so the longest possible stretch out is 15.3 years, regardless of who ends up inheriting the IRA. It’s true that an IRA owner could be age 70 in the first distribution year, but if he died in that year, he would have died before his RBD and the IRA with no designated beneficiary would have to be paid out under the five year rule.

Example:

An IRA owner is 70½ years old in 2004 and for whatever reason has no designated beneficiary. 

The default language in the IRA custodial document says that at his death the IRA beneficiary is his estate. He dies in June 2005, which is after his RBD of April 1, 2005. If he died in 2004, his first required distribution year, he would have died before his RBD, and with no designated beneficiary the heirs of his estate would be stuck with the 5-year payout. Since he died after his RBD, the IRA can be paid out over his remaining single life expectancy of 16.3 years based on his age in the year of death (age 71 in 2005). The first post-death required distribution must be taken by the end of 2006, the year after the IRA owner’s death. For the first beneficiary distribution, the life expectancy will be 15.3 years (the 16.3 years less one year). The 15.3 years will be reduced by one for each succeeding year.

The above example illustrates the longest possible payout after death when there is no designated beneficiary. Most IRAs will be paid out sooner. In case you were wondering, the shortest possible payout with no designated beneficiary is not 5 years, but can be even less. If the IRA owner died after age 89, the remaining life expectancy would be less than 5 years. The single life expectancy for an 89-year old is 5.9 years. If he dies at age 89, the remaining payout on the IRA would be only 4.9 years. If he died after reaching 111 years of age, the entire IRA would have to be paid out in the year following the year of the IRA owner’s death.

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