Old Practical Considerations

Whenever distribution planning is done for IRA's, qualified retirement plans and TSA's, several fundamental concepts continually surface. Tax deferral is usually near the top of the list. Not far behind is the ability to control the timing of taxable distributions. However, the ultimate concern for most participants is seldom a tax matter or even an investment worry. If asked to name what troubles them most about their retirement nest egg, participants usually respond with statements about exhausting their capital base. When pressed further, those individuals often express hope that their beneficiaries will end up with more than Uncle Sam if there is anything left to distribute following death. Fortunately, a number of ways do exist to help alleviate those concerns. Not too surprisingly, good tax planning plays a key role in the process.

The following remarks cover a number of common circumstances that call for prudent distribution planning. The discussion is arranged chronologically. The initial section addresses what should be done if a participant or beneficiary dies before reaching the required beginning date. The second portion covers the election that participants face when they attain age 70½ as well as the estate planning implications of their decision. The final part of the discourse deals with a spousal rollover IRA that is created following a participant's death after his or her RBD.

The text below matches the third part of Financial and Estate Planning Implications of the Minimum Distribution Rules: Turning Quicksand Into Terra Firma. After completing Practical Considerations, readers may wish to peruse the first and second segments of "Quicksand". Those sections are located on separate pages of this web site entitled "Rules Of The Road" and "Planning Pointers" respectively. The former outlines various facets of the tax law while the latter provides important reminders to individual participants, their beneficiaries and planning professionals. Both pages augment the points discussed in Practical Considerations.

Disclaimer

Readers must take note that information presented in this document reflects the author’s attempt to describe various points of the Federal tax law. Some important topics have been omitted. Keep in mind that state tax laws may differ from the Federal rules. While every effort has been made to accurately report the provisions of the Internal Revenue Code and the Regulations pertaining thereto, it is possible that a misrepresentation has occurred. Naturally, the Code and Regulations control the tax treatment of any situation, not the author’s interpretation. Therefore, taxpayers should rely on the tax law rather than positions put forth in this paper.

PRACTICAL CONSIDERATIONS

Death Before The Required Beginning Date

If a beneficiary of a qualified plan dies before the participant has reached his or her RBD, the road to follow is usually smooth and straight. No distributions are triggered by the beneficiary’s death and the status quo will usually suffice for a while. Please note, however, that item number 1 listed below does require immediate attention. The other administrative details can be considered in due course.

If the beneficiary that dies shortly before the RBD and that person is the non-participant spouse (NPS), it is prudent to revisit the participant’s recent election concerning what method will determine the life expectancy factor used for calculating required distributions. For example, if the participant has elected to redetermine his or her own L.E. factor each year, it may be appropriate to amend that election so that the life expectancy is NOT redetermined. Such a modification is always beneficial if the couple’s children have become the primary beneficiaries due to the death of one parent.
Once the survivor’s emotions have stabilized, it is time to revise the beneficiaries listed with the plan administrator, IRA custodian or TSA trustee. While contingent beneficiary provisions should take care of matters during an interim period, it is now appropriate to look farther down the road.
The certainty of succession may now dictate a revision of other estate planning documents. Make sure those new arrangements and the revised beneficiary designations for the qualified plans work in concert with one another vis-à-vis the required distribution rules.
The matter of control over the disposition of the deceased spouse’s community property interest in the qualified plans may arise. Happily, that thorny legal issue is beyond the scope of this paper and the knowledge of its author. Nevertheless, the surviving family members as well as their professional advisors need to be attuned to this concern and realize that adherence to §401(a)(9) does not resolve the question.

In cases where a plan participant dies before his or her RBD and his or her spouse is the beneficiary, the highway suddenly becomes quite bumpy and full of sharp curves. A spectrum of estate and distribution planning skills will be needed if the survivors wish to avoid an accident and continue their journey. At the very least, the named beneficiary could be forced to withdraw all the funds immediately or follow one of the restrictive distribution provisions outlined at the top of Table 3. Hopefully, the plan documents will allow the beneficiary to follow the liberal path spelled out in tax code §401(a)(9)(B)(iii) or (iv) as outlined on Table 2 of this report.

Following a participant’s death, a non-participant spouse (NPS) who is a beneficiary has one remedy not open to others. If the distribution and/or investment options offered by the existing retirement plan are not acceptable, the NPS may execute a spousal rollover of all the qualified plan assets into an Individual Retirement Account of his or her own. While this step is often a foregone conclusion for most laypeople, it should not be the only possibility or concern to pop into the mind of a professional planner.

For starters, a surviving spouse may NOT roll over a required distribution. [§402(c)(4)(B)] Under certain circumstances the required distribution may equal the entire balance in the qualified plan. [See LTR 9850016] If so, the rollover option is unavailable.
Leaving the assets in the existing plan has a major advantage that may be absent from a spousal rollover. The key is whether or not the existing plan allows an election under the Spousal Exception to the Five Year Rule outlined on Table 2. If it does, a middle-aged surviving spouse who was born about the same time as the deceased participant, would be able to leave the assets in that plan while retaining the ability to withdraw funds at random without tax penalty -- regardless of age. For example, a fifty year old widower DB can withdraw varying amounts of money from the plan at anytime he wishes without being concerned about a 10% Federal excise tax (plus 2½% in California) on premature distributions. That degree of flexibility prior to age 59½ would be absent in any spousal rollover IRA because the surviving spouse is the owner of the new account and is subject to premature withdrawal penalties. Please be alert that leaving the assets in the deceased participant’s qualified plan produces one potential drawback if the surviving spouse avoids the Federal excise tax on a pre-59½ withdrawal due to the death exclusion provided in §72(t)(2)(A)(ii). Once that mandatory exclusion applies to a withdrawal, the surviving spouse may no longer convert the account to his or her own name via a spousal rollover. [LTR's 9418034 and 9608042] Furthermore, he or she will be limited to the use of a single life expectancy factor when it comes time to compute required distributions. (See paragraph B 2 below.)
However, distribution flexibility may motivate a surviving spouse to take the opposite approach, i.e., shun the old plan in favor of a rollover IRA. That would be the case if a deceased participant were close to his or her RBD but the surviving husband or wife were considerably younger and able to maintain a comfortable lifestyle without pulling money from the qualified plan. Prolonging the tax deferral by way of a spousal rollover IRA would probably make sense in this case.

Whether it is carried out immediately following a participant’s death or shortly before required distributions must be taken from the original plan, a spousal rollover is the only way a surviving spouse will be able to utilize a joint life expectancy factor when computing minimum required distributions. That boon to tax deferral is an irresistible force that eventually leads to a spousal rollover in most cases. Subject to the limitations discussed above, the surviving spouse may execute such a rollover at anytime.

By contrast, a non-spouse beneficiary seldom has as much flexibility as a surviving spouse. All is not lost, however, in cases involving the death of a plan participant prior to his or her required beginning date if a non-spouse is the beneficiary. There is some room for post mortem planning that can assist the survivors.

If the qualified plan is an Individual Retirement Account or Tax Sheltered Annuity under §403(b), the beneficiary may leave that account with the existing custodian or trustee and begin taking minimum required distributions under the General Exception to the Five Year Rule outlined on Table 2. Please note that this approach is not a rollover to a new owner. The "inherited" account continues to bear the name of the deceased participant but is controlled by the beneficiary. Taxable transactions associated with this beneficiary distribution account reflect the Social Security Account Number of the beneficiary. [Rev. Proc. 89-52]
If the beneficiary of a deceased participant's IRA or TSA is displeased with an existing custodian or trustee, that beneficiary may request a trustee-to-trustee transfer of the assets to a new IRA or TSA of their own choosing. Presumably, the new account will offer more distribution options and/or higher potential for favorable investment results.
Unfortunately, a non-spouse beneficiary is effectively stuck with the decedent’s old pension, profit sharing or stock bonus plan. While this is not always a problem, it can be a very limiting factor. For example, many 401(k) plans will not permit a non-spouse beneficiary to stretch out distributions even though allowed under the income tax rules illustrated on Table 2. PLANNING ALERT: If a terminally ill participant has a sizable balance in a corporate plan with a non-spouse as the beneficiary, serious consideration should be given to shifting those assets to an IRA while the person is alive. That switch will greatly enhance the post mortem planning possibilities. BEFORE implementing this planning alert, however, please read the cautionary comments in Planning Pointer "G".

Table 6 presents a fact pattern involving a pre-RBD death with non-spouse beneficiaries. It shows that continued tax deferral provides the heirs with a significant financial reward. Naturally, facts and assumptions will always control the outcome of any financial projection. Remember too that such a projection is not a guarantee of future results. Nevertheless, the idea of tax-deferred accumulation needs to be understood by beneficiaries so they can gauge the value by their own criteria.

Table 6 illustrates the results that might be achieved if a pair of forty- year-old twin sisters adopted contrasting means of handling an inherited IRA. Their mother died of cancer a number of years ago. Their widower father, a retired aerospace engineer, perished in an automobile accident last year at age sixty-eight. The twins are listed as equal primary beneficiaries of his $400,000 Individual Retirement Account. For purposes of this illustration it is assumed that their father's estate incurred no Federal estate tax liability.

Each sister decides to preserve her respective share of the IRA so the assets will be available at age sixty-five to augment her other retirement capital. Neither sister wants to boost her current income but each recognizes that future circumstances might dictate a need to dip into principal or at least draw off some income for living expenses.
Sister #1 lives in a small coastal town in Southern California where competent advice is difficult to obtain. Due to the rural location, Sister #1 and her husband are left to their own resources to determine what to do with her $200,000 share of the IRA. After perusing IRS Publications 575 and 590 they immediately withdraw the funds rather than delay tax consequences for five years. A short while after receiving that distribution, Sister #1 decides to take advantage of a promising investment opportunity she read about in a major financial publication. When preparing the cheque for the new investment, Sister #1 complains to her husband that she has less than two-thirds left to invest after setting aside enough to pay the large tax bite on the distribution from her father's IRA.
Sister #2 is a bit more fortunate. By living in a major metropolitan community in Northern California she has little trouble seeking professional help and benefits from thorough distribution planning by a team of skilled specialists. Those experts advise Sister #2 to leave her $200,000 share in the existing IRA. They allow her to change the investment so it matches the one used by her sister. However, the professionals stipulate that before year's end Sister #2 must commence a series of minimum withdrawals over her life expectancy. (See the General Exception to the Five-Year Rule shown on Table 2.) They urge her to leave the undistributed balance inside the IRA so it may continue to compound tax-deferred. The advisors further suggest that she reinvest the after-tax portion of the annual distributions in a private account using the same investment utilized within her father's old IRA. The combined Federal and California net top-dollar tax bracket for Sister #2 and her husband is the same as the rate paid by their Southern California relatives.

It is not surprising to see that Sister #2 accumulates considerably more money than her twin sibling does by age 65. Remember that the tax and investment parameters are identical for both sisters. The only difference is Sister #2’s use of the tax-deferred "inherited" IRA. When the results are reported on Table 6, however, everything is converted to an AFTER-TAX position for both sisters. The black dots for each year along the line for Sister #2 assume that she cashes out whatever balance remains in the "inherited" IRA that year, pays taxes on the distribution and adds the residual to the accrued balance in her outside accumulation account. Every year that combined total compares quite favorably with the outcome achieved by her less fortunate sister.
When reviewing Table 6, keep in mind that Sister #2 is free to withdraw from her father's old IRA at anytime without tax penalty. The only tax limitation deals with minimum withdrawals each year. This means Sister #2 is able to take advantage of prolonged tax deferral while maintaining just as much liquidity as her Southern California sister.

Distributions At Age 70½ and Beyond

One of the primary concerns facing most participants that are on the brink of reaching their Required Beginning Date focuses on what to do about minimum required distributions. Loosely translated, that worry says, "What must I do to comply with this complex law, and how can I minimize the taxable distributions I must start receiving when I turn age 70½?" Seldom do participants equate their anxiety with estate planning. Yet, the post mortem disposition of their plan assets will be strongly influenced by how they choose to compute their MRD’s. Of course, participants can drive around this large pothole by withdrawing 100% of their account balance before the Required Beginning Date. Barring such a drastic step, clients face several choices.

Participants without a Designated Beneficiary on their required beginning date are limited to one decision, assuming their qualified plan has not already made the selection for them. [See Table 5] Does the client want to redetermine his or her life expectancy each year when computing minimum required distributions?

A participant that wishes to minimize required distributions will usually choose to redetermine life expectancy because that approach produces a smaller taxable withdrawal each year during his or her lifetime.

Naturally, the smaller the annual required distribution the greater the balance left in the qualified plan.
Redetermining the life expectancy (L.E.) factor has the added advantage of allowing distributions to continue if the participant lives past his or her expected longevity. Effectively, the client cannot outlive the income stream from the qualified plan.
If redetermination is used, the L.E. factor for the first year is the same one utilized by the fixed-period method discussed in the next paragraph. Therefore, the required distribution for the first year is identical under both methods. With redetermination, however, the L.E. factor drops by less than one full year for each year the participant lives past age 70½. An example of the calculation is shown on Table 1A.

Not redetermining the participant’s life expectancy factor is sometimes described as the fixed-period or straight-line method. Following the initial distribution year, the L.E. factor used for that original year is reduced by one full year for each elapsed year since age 70½. An example of the calculation is shown on Table 1B.

A straight-line decline in the life expectancy factor means that the L.E. factor reaches zero at the end of the fixed-period. Mathematically, that method produces a progressively larger distribution of the plan assets than would occur using redetermination.
Furthermore, all plan assets must be distributed by the end of the life expectancy period if the L.E. factor is not redetermined. That means nothing will remain in the account if a participant outlives the life expectancy table.

Table 7A provides a visual comparison of the two methods discussed above. That table reports the balance remaining in a qualified plan each year starting at age 70½ depending on whether or not a participant chooses to redetermine the life expectancy factor when calculating minimum required distributions. When viewing Table 7A, please be sure to peruse the assumptions and cautions listed on the bottom of the table in order to gain a complete understanding.

The dotted line connecting the diamonds depicts the account balance each year if life expectancy is allowed to decline on a straight-line basis over a fixed-period. Note that the account is depleted in the sixteenth year.
By contrast, the solid line with the stars on Table 7A shows that two-thirds of the original balance remains in the plan if the participant has been redetermining life expectancy. At age 100 he or she still has a bit left in the account. Naturally, both lines would show different outcomes if the earnings assumption were changed.

If income tax considerations during the participant’s lifetime were the sole determinant, the analysis would conclude at this point. However, estate planning questions will not allow us to pull off the highway into a rest stop just yet. In fact, a participant that fails to consider the ultimate disposition of his or her qualified plan is shirking an important responsibility. Although this discussion assumes that the qualified plan lacks a Designated Beneficiary, there will always be a named beneficiary for the plan even if the latter is merely the participant’s estate. In fact, the beneficiary could be a relative or friend that was named as beneficiary after the qualified plan slipped into non-DB status.

A participant that opts to redetermine life expectancy will force the named beneficiaries to remove 100% of the account balance by December 31 of the year following the participant’s death. Such a requirement could generate a gigantic tax liability for the heirs. Furthermore, the latter have no ability to control the timing of the taxable event.
On the other hand, a decision to reduce the life expectancy factor on a straight-line basis allows beneficiaries to complete the minimum distribution pattern after the participant’s death. That means, for example, the heirs could continue MRD’s for another ten years if a participant died after living only six years of the sixteen year life expectancy he or she had at age 70. The tax deferral and timing aspects of such a possibility would be quite attractive.
Table 7B illustrates the concepts outlined in the two previous paragraphs. That table includes all the assumptions and cautions used to create Table 7A. Table 7B also uses the same symbols and legend to represent the contrasting methods for computing required distributions. However, Table 7B assumes that the participant dies during the sixth year of required distributions. That is to say, death occurs at age 75. If he or she died earlier or later, the solid line with the stars would fall to zero the year following the revised year of death rather than at the spot plotted on the table. That adjustment would be necessary in order to reflect the fact that beneficiaries of an account using a redetermined L.E. factor are forced to make a complete withdrawal following the year of death. In contrast, beneficiaries of an account using a fixed-period method of determining life expectancy may continue withdrawals over the remaining balance of the participant’s original fixed-period.

Participants using a Non-Spouse as the Designated Beneficiary are allowed to make two choices when they attain age 70½, assuming the provisions of their IRA, qualified retirement plan or TSA have not already made the selections for them.

The first option is identical to the one facing participants without a BD. That is to say, does the owner of the plan want to redetermine his or her life expectancy each year? Discussion of this point follows the same decision process outlined above for participants that fail to have a BD, including the material shown on Table 5.
The second consideration focuses on whether to use a single L.E. factor for the participant alone or a joint and last survivor life expectancy factor in conjunction with his or her DB.

The latter is the automatic default in the Code and Proposed Regulations, provided there is a Designated Beneficiary for the qualified plan. [§401(a)(9)(A)(ii) and §1.401(a)(9)-1, D-2A(b)] However, it is possible for the plan provisions to specify the use of a single life expectancy factor. Only a careful reading of the plan document will tell you if a single L.E. factor is required. If not, a joint life expectancy factor is valid.
Use of a joint L.E. factor has noticeable financial and estate planning advantages. It allows greater tax deferral for the participant as well as the beneficiaries. On the other hand, a single L.E. factor forces the participant and his or her beneficiaries to accelerate their income tax recognition because the qualified plan distributions will be considerably larger due to a shorter payout period.

Table 8A graphically displays the balance remaining in a qualified plan based on the four methods of determining life expectancy if a non-spouse is the DB.

The lines on this table connecting the stars and diamonds are the same as those on Table 7A that depict the results using only a single life expectancy. That is to say, the solid line running between the stars shows the balance remaining in the qualified plan each year if a redetermined single life expectancy is used to compute required distributions (Single Redetermined). The dotted line with the diamonds reports the results if only a single life expectancy is used for a fixed period (Single Fixed-Period).
The solid line on Table 8A that connects the black circles reflects the balance remaining in the qualified plan each year if a joint life expectancy method is used that redetermines a 70-year-old participant's life expectancy but not that of a 67-year-old non-participant DB. Note that the calculations for determining the joint life expectancy factor in this example are identical to those used by a married couple under the Hybrid Method.
The dashed line that joins the triangles on Table 8A represents the balance remaining in the account each year if a joint life expectancy is used over a fixed-period with a 70-year-old participant and a 67-year-old non-spouse DB (Joint Fixed-Period).
A quick glance at Table 8A confirms that a fixed-period distribution method forces a full liquidation at some point regardless of whether a single or joint L.E. factor is utilized. This is the same problem that appears on Table 7A. The zero point merely moves farther down the road when using a joint life expectancy. However, a joint L.E. factor enhances the outcome even more for participants that redetermine the participant’s life expectancy.

The first footnote on Table 8A should not be overlooked. The lines on the table would differ if the DB were older or younger than age 67. However, the pattern of those lines would remain the same unless the MDIB Rule applies to the case.

It is important to remember that the MDIB Rule places an artificial limitation of ten years on the age-spread between a participant and a younger non-spouse designated beneficiary. The same rule holds true if the participant’s spouse happens to be more than ten years younger than the participant and he or she is the oldest among several DB’s. That fact pattern often arises when a bypass or QTIP trust is named as the beneficiary of a qualified plan. [§1.401(a)(9)-2, Q-7(b)]
If the first assumption on Table 8A were changed so that the designated beneficiary becomes a child that is twenty-five years younger than the participant, the MDIB Rule will apply. The "applicable divisor" mandated by the MDIB Rule simplifies calculations during the participant’s lifetime and produces only one line regardless of which joint life expectancy method is elected by the participant. The dashed line with the solid squares on Table 8AA shows the balance remaining in the qualified plan each year as a result of the MDIB Rule under the modified fact pattern. The other two lines on Table 8AA are identical to their twins on Table 8A. Please remember that only three lines are possible on Table 8AA.

The estate planning implications that arise from having a non-spouse as the Designated Beneficiary closely parallel the earlier discussion of non-DB status as illustrated on Table 7B. However, several additional elements do enter the picture when a joint life expectancy factor is used.

An election to reduce the joint life expectancy factor on a straight-line basis over a fixed-period produces the same post mortem options outlined above when a single L.E. factor is used. That is to say, the beneficiaries may complete the remainder of the original (joint-life) distribution period existing at the time the participant dies.
When the participant’s life expectancy is being redetermined annually, use of a joint L.E. factor may eliminate the need to flush out the account in the year after the participant’s death.

Instead of liquidating 100% following the participant’s death as is true whenever a single redetermined L.E. factor is used, the BD may continue withdrawing MRD’s over the remaining period of his or her own life expectancy. [§1.401(a)(9)-1, E-8(b)] Unfortunately, this opportunity evaporates whenever the Designated Beneficiary has no remaining life expectancy at the time the participant dies. In other words, a beneficiary must withdraw all the funds by the end of the year following the year of the participant’s death if the participant outlives the DB’s single life expectancy. Please note, however, that such a scenario is rather unlikely when the MDIB Rule is in effect. [See paragraph 5 c below for a discussion of the estate planning implications whenever the MDIB Rule comes into play.]
Table 8B illustrates the variables addressed in the preceding narrative assuming the participant dies in the tenth year of required distributions (age 79). The symbols, lines and legend as well as the other assumptions are identical to those same features on Table 8A. That is to say, the solid line running between the stars shows the balance remaining in the qualified plan each year if a redetermined single life expectancy is used to compute required distributions (Single Redetermined). The dotted line with the diamonds reports the results if only a single life expectancy is used for a fixed period (Single Fixed-Period). The solid line that connects the black circles reflects the balance remaining in the qualified plan each year if a joint life expectancy method is used that redetermines the participant's life expectancy but not that of the non-spouse DB. The dashed line joining the triangles represents the balance remaining in the account each year if a joint life expectancy is used over a fixed-period (Joint Fixed-Period). Please remember that a different year of death for the participant would alter the values represented by the various lines on Table 8B.

In cases involving the MDIB Rule, the likelihood of a participant outliving the DB’s single life expectancy is seldom a concern, especially if it is a child that is twenty-five years younger than the participant. Therefore unless precluded by the terms of the qualified plan, beneficiaries will probably be eligible to stretch out post mortem distributions for a prolonged period. This stretch-out is in addition to the significant tax deferral facilitated by the "applicable divisor" used for computing required distributions during the participant’s lifetime.

Beginning the year following the death of the participant, the MDIB Rule drops by the wayside. Instead, required distributions are computed using the primary method under §401(a)(9)(A)(ii) that would have applied to the participant prior to his or her death had the MDIB Rule not been triggered by the large age spread between the participant and DB. [§1.401(a)(9)-2, Q&A-3]
The dynamics of switching from the MDIB Rule to the primary method following a participant’s death is illustrated on Table 8BB. The extra stretch-out of required distributions is especially favorable for estate planning purposes. Please note that this table uses the same symbols, lines and legend as Table 8AA to represent the contrasting methods for computing required distributions. Furthermore, it incorporates the same assumptions and cautions. However, Table 8BB assumes that the participant dies during the tenth year of required distributions. That is to say, death occurs at age 79. The difference in the two lines following that death is due to the participant's election of a primary method prior to his or her Required Beginning Date. Please remember that a different year of death for the participant would alter the values represented by the various lines on Table 8BB.

When a spouse is the Designated Beneficiary, the participant’s list of possible methods for determining the proper life expectancy factor totals six. Once again a participant must peruse the provisions in each plan document to be certain he or she is free to select from all the options provided in the tax rules.

Although a qualified plan’s provisions may force a married participant to use a single life expectancy when computing MRD’s, such a requirement is seldom encountered. In the event plan provisions dictate this approach, the discussion points presented on previous pages would apply. Otherwise, a joint life expectancy factor is assumed as long as the non-participant spouse is the Designated Beneficiary of the qualified plan.
Whether or not it is desirable to redetermine a married participant’s life expectancy is the second decision point. The reasoning follows the same line of thought visited several pages ago.
The new entry on the list of variables concerns the benefit of redetermining the spouse’s life expectancy. Remember that when a non-spouse is the DB, this choice is unavailable. Only the L.E. factor of a non-participant spouse serving as the Designated Beneficiary may be redetermined. If selected, the mathematical process is identical to the one used when a participant’s L.E. factor is redetermined.
Combining the variables outlined in the last three paragraphs, six possible methods arise for determining the appropriate life expectancy factor whenever a non-participant spouse serves as a qualified plan’s Designated Beneficiary.

Single life expectancy for a fixed period (Single Fixed-Period).
Redetermined single life expectancy (Single Redetermined).
Joint life expectancy for a fixed period (Joint Fixed-Period).
Joint life expectancy redetermining BOTH spouses (Dual Redetermined)
Joint life expectancy redetermining only participant (Hybrid Method).
Joint life expectancy redetermining only non-participant spouse (Reverse Hybrid).

While entry "f" on the preceding list is permissible under Proposed Regulation §1.401(a)(9)-1, the author has yet to encounter a circumstance in which it would be the most appropriate choice. Please note that when planning practitioners and authors of technical journals mention the Hybrid Method, they seldom, if ever, stipulate which hybrid technique serves as their reference. Invariably, they mean entry "e" on the list above. Throughout this paper, the expression Hybrid Method refers to a joint life expectancy created by redetermining only the participant’s L.E. factor. This approach maintains continuity for a reader who might encounter the same phrase in other literature.
Among the six methods a married participant could use to determine the life expectancy factor for computing required distributions, only three are worthy of consideration. Please disregard the Reverse Hybrid approach for the reasons mentioned above. Similarly, ignore both methods that utilize a single life expectancy. They provide no advantage during a participant’s lifetime and reduce post mortem planning possibilities for the heirs. If a participant wants to accelerate lifetime withdrawals, the prudent choice is to make distributions in excess of the minimum computed by using a joint L.E. factor.

The graph on Table 9A shows the balance remaining in a qualified plan using the three methods of determining joint life expectancy that ought to be considered by a married participant. Please peruse the assumptions and cautions listed at the bottom of that table. Modifying one or more of those assumptions could alter the position of the lines and, hence, influence an observer's conclusion.

Make a mental note that the solid line with the black circles representing the Hybrid Method on Table 9A follows a path that is similar in shape to the line on Table 8A with the same features. After all, the Hybrid Method for married couples involves the same calculations required when a participant with a non-spouse DB uses a joint L.E. factor and redetermines his or her own life expectancy. Note also that on Table 9A the assumed ages of the participant and spouse DB are identical while on Table 8A the non-spouse Designated Beneficiary is three years younger than the participant.
For the same reason, the dashed line joining the open triangles on Table 9A that depicts a married couple’s use of a joint life expectancy over a fixed-period follows a trajectory that closely mirrors the line on Table 8A with similar markings.
The results of redetermining the life expectancy of both spouses appears on Table 9A as open squares joined by a dashed line.

A cursory glance at Table 9A is likely to lead a reader to conclude that Dual Redetermined is the best choice. In fact, the table confirms the notion that the smaller annual distributions stipulated by the Dual Redetermined approach enhance accumulations inside a qualified plan. Of course, those skimpier distributions also mean less taxable income to report each year.
Unfortunately, there is a potential danger lurking down the road whenever a married couple opts to redetermine both life expectancies.

For starters, please note that Table 9A is built on the assumption that neither spouse dies until after age 100. In the event that scenario proves to be correct, the Dual Redetermined method is superior to the other options. However, the author has yet to find a married couple that thought they would both live to become centenarians.
If the non-participant spouse (NPS) dies first, his or her remaining life expectancy becomes zero in the year after death. Effectively, this forces the participant to use a single life expectancy factor from that point forward. While no one wants to believe his or her mate will predecease them, the harsh reality revealed in mortality tables contradicts that human fantasy.
Further compounding the planning process is an accepted "fact" in our society that a woman will outlive her husband. Unfortunately, that is a potentially dangerous misconception that runs counter to empirical evidence. Therefore, it is important to keep in mind the brief summary of statistical probability contained in the next paragraph -- regardless of the participant's gender.
In cases where a participant and NPS are both age 70 in the same year, there is a 34% chance that the wife will predecease her husband. If the wife were 65 and the husband 70, the woman has a 23% statistical probability of dying first. When a wife is five years older than her 70-year-old husband, the woman will predecease him 47% of the time. [Michael L. Vorkapich, a pension actuary and personal friend, provided these values after perusing the 1983 Group Annuity Mortality Tables for males and females. He can be reached at mike@reliantpension.com.]
For a discussion of the considerations involved when a married participant dies first, please peruse a subsequent section of this paper entitled "Spousal Rollover Following Post-RBD Death of Participant".

Table 9E graphically reports what happens to a qualified plan balance if a non-participant spouse serving as the Designated Beneficiary dies in the fourth year of required distributions. Please observe that the plots for the Hybrid Method and Joint Fixed-Period do not vary from their positions on Table 9A. However, the line for the Dual Redetermined method drops below the other two. This eliminates the advantage of tax-deferred accumulation the participant originally expected he or she would receive from that method. Naturally, using different age assumptions and dates of death for the non-participant spouse might lead to varying outcomes. For example, death of the same non-participant spouse anytime after the ninth year of required distributions leaves the dashed line connecting the squares above the other lines. The latter observation reflects the results shown on several graphs that are not reproduced with this report.
However, the largest disincentive associated with the Dual Redetermined method occurs following the death of a participant whose non-participant spouse predeceased him or her. In the year following that second death, the entire balance in the qualified plan must be distributed to the beneficiaries and reported as taxable income. No stretch-out or tax deferral is possible. Table 9F provides a graphic representation of the outcome. It is a continuation of the fact pattern assumed on Table 9E. Please note that the dashed line with the squares representing Dual Redetermined method goes to zero in the year immediately following the year of the participant’s assumed death.
If it were possible to know in advance the sequence and timing of a married couple’s deaths, the uncertainties of distribution planning would be eliminated. Absent that degree of clairvoyance, married participants need to work their way through a somewhat complicated decision process that uses Table 9A as a starting point. Now that it has been shown that redetermining both life expectancies has undesirable side effects, does another option shown on Table 9A represent a reasonable alternative?

A closer examination of Tables 9A and 9E reminds readers that the line representing a fixed-period joint life expectancy (dotted line connecting diamonds) must reach zero at the end of the Joint Fixed-Period. While that may not appear to be a flaw in the mind of young observers, it definitely rings bells among seniors. Probably the number one financial concern voiced by members of the latter age group is a desire to maintain their independence and avoid becoming a burden to their relatives or children. Seniors grow apprehensive whenever they see a chart showing that a significant block of their investment portfolio could evaporate before they die. While a strong case can be made in support of electing a Joint Fixed-Period, most participants approaching their Required Beginning Date will shy away from that option.

Before dismissing the Joint Fixed-Period method as worthless, please peruse Table 9F. That graph demonstrates the viability of Joint Fixed-Period in cases where both spouses are terminally ill or their deaths can be reasonably expected to occur in the 70’s.
Using a Joint Fixed-Period also makes sense in advanced estate planning situations when the NPS will not be able to execute a spousal rollover after the participant dies because a trust is named as beneficiary of the qualified plan.

Fortunately, Tables 9A, 9E and 9F provide a third alternative. It is the solid line joining the black dots. Based on the assumed facts stated at the bottom of each graph, that line represents the expected results under the Hybrid Method if only the participant’s life expectancy is redetermined. Note that the line’s location is identical on both Tables 9A and 9E. The duplication is due to the fact that Hybrid Method calculations remain the same during a participant’s lifetime if the non-participant spouse predeceases the participant. For that reason the Hybrid Method provides superior results if the NPS dies during the early years of required distributions. In fact, studies not included with this report indicate that the Hybrid Method maximizes the qualified plan balance if a same-age non-participant spouse dies anytime before the tenth year of required distributions. Naturally, a younger or older NPS might alter the outcome.

Please note that the solid line with the black dots does NOT produce the most favorable results on Table 9F. On that table it is assumed the participant dies shortly after the "early" death of the NPS. Hybrid Method calculations change in the year following the year of the participant’s death because the latter’s redetermined life expectancy has become zero. (See the right side of the flow chart on Table 4A for more details.) All that is left for the beneficiaries to use in the years following a participant’s death is the original single L.E. factor of the NPS minus the number of elapsed years. Note also that if the participant dies after all the years have elapsed from the original single L.E. factor of the NPS, everything must be withdrawn from the qualified plan in the year following the participant’s death.
In summary, Table 9E demonstrates that the Hybrid Method may produce superior results for the participant based on certain assumed facts if the NPS is the first to die. Table 9A shows that the Hybrid Method is the second best choice if both spouses are long-lived. Table 9F illustrates that the Hybrid method can be relatively effective in maintaining tax deferral if both spouses die shortly after commencing required distributions. Unfortunately, the Hybrid Method does not show the most favorable outcome under all circumstances. At best, it is a compromise solution to a vexing question. Typical of all compromises, the Hybrid Method produces acceptable or favorable results under many scenarios, but not in every case.

While reading the preceding paragraphs it becomes apparent that a married participant of a qualified plan will find him or herself in a quandary at age 70½ because there is no clear-cut answer as to which highway is best to follow. That dilemma raises the question, "What can a participant do to facilitate tax deferral during his or her lifetime and simultaneously allow the heirs to stretch out any residual balance?" Not surprisingly, several steps are worthy of consideration, but none provide a perfect solution.

The major drawback to using either a Joint Fixed-Period or the Hybrid Method to arrive at a L.E. factor is that they produce larger required distributions than if both life factors are redetermined. Those accelerated withdrawals deplete the account balance faster than with the Dual Redetermined approach. Hence, tax recognition occurs sooner and less remains in the qualified plan to pass along to beneficiaries.
Fortunately, there is no requirement to consume every penny of the incremental difference in annual MRD’s. After all, a participant that elects the Dual Redetermined method willingly agrees to take, and perhaps spend, the least amount possible from the qualified plan each year. If either of the other methods were selected, a larger required distribution would occur annually after the initial year. By depositing the after-tax residual of those "extra" periodic distributions in a private account, a substantial sum would accumulate. If that private accumulation were coupled with the balance remaining in the qualified plan, the combined total would go a long way toward matching the results obtained by a married couple that decided to simply redetermine both life expectancies.

Table 10C shows the outcome of the combination plan outlined in the preceding paragraph. The graph plots the total net value AFTER ALL INCOME TAXES that would be available for the participant or heirs if the private accumulation account were added to the net withdrawal of all funds from the qualified plan that same year. Based on various assumptions listed on the graph, Table 10C demonstrates that until their mid-80’s, a married couple can closely parallel the results obtained via the Dual Redetermined approach by using either the Joint Fixed-Period or Hybrid Method combined with judicious accumulation of the "extra" periodic distributions in a private account. With this unique combination of required distributions and conscientious thrift, no problem arises if the non-participant spouse dies first. It is important to note, however, that starting at age 87 the combination plan begins falling progressively farther below the outcome under the Dual Redetermined method.
There is another key element in the combination plan that deserves extra special attention. Without the private accumulation account the entire concept comes to a screeching halt. Given the public’s propensity to consume and aversion to saving, this author is compelled to raise yellow caution flags to anyone voicing a desire to implement the combination plan but lacks a demonstrated ability to carry out a long-term savings program.

One advantage to the combination plan does not appear on Table 10C. It occurs if the participant dies in his or her seventies after being predeceased by the non-participant spouse. Under those circumstances the Joint Fixed-Period as well as the Hybrid Method do not force the beneficiaries to fully liquidate a qualified plan. That feature provides an opportunity for continued tax deferral depending on when the second death occurs. The extra after-tax accumulation made possible by the stretch-out is a bonus on top of the Table 10C values.

Spousal Rollover Following Post-RBD Death of Participant

Preceding sections of this paper dealing with married couples assume that the non-participant spouse DB will be the first to die following the Required Beginning Date. When the reverse sequence occurs, a number of additional options become available – assuming, of course, that the surviving spouse is the beneficiary of the qualified plan.

In addition to the full range of choices available to other beneficiaries, a spouse is free to transfer the qualified plan assets into a spousal rollover IRA. The flow charts shown on Tables 4A and 4B diagram all the planning possibilities discussed in the following paragraphs.

If a surviving spouse decides to leave the assets in the participant’s qualified plan, the account must continue to be distributed at lease as rapidly as under the method of distribution being used to comply with the MRD rules of §401(a)(9)(A)(ii) on the date of death.

In the year a participant dies, required distributions are computed as though he or she were alive the entire year.
Required distributions in subsequent years may, or may not, be impacted by the death. The explanations in the shadowed boxes on Tables 4A and 4B provide the details in all possible scenarios. NOTE: In some cases 100% of the plan must be distributed no later than December 31 of the year after the participant dies.
In all cases where a surviving spouse elects to leave investments inside the participant’s old account, that survivor is allowed to name a new beneficiary of his or her own choosing. However, the life expectancy of the new beneficiary does NOT enter into the required distribution calculations.

If a surviving spouse as beneficiary of a qualified plan prefers to roll over the plan assets into an Individual Retirement Account of his or her own, a brand-new account is created. The usual required distribution rules under §401(a)(9) apply to the new account with the surviving spouse serving as the participant.

Normally the surviving spouse will name one or more beneficiaries for the rollover IRA. Assuming those beneficiaries qualify as Designated Beneficiaries, the life expectancy of the oldest DB will be used when computing required distributions -- provided a joint L.E. factor is allowed by the IRA custodian or trustee.

Until the year a participant in a spousal rollover IRA attains age 70½, there are no required distributions. For example, a 65-year-old participant in a spousal rollover IRA must wait a few more years before he or she falls under the lifetime distribution requirements of §401(a)(9)(A).
If the transfer to a spousal rollover occurs during or after the year in which a surviving spouse attains age 70½, the first required distribution from the rollover account need not take place until December 31 of the year following the year of the transfer. The proper L.E. factor to use when computing those required distributions is discussed in Planning Pointer "I". Please remember to continue taking required distributions from the deceased spouse’s qualified plan under the "at least as rapidly" rule up to and including the year the assets shift into the spousal rollover.
In the event the transfer into the spousal rollover takes place during the year before the surviving spouse attains age 70½, he or she is entitled to delay the initial year’s distribution from the rollover account until April 1 of the year following age 70½. This is the same rule that applies to IRA assets that were his or her own from the beginning.

The Minimum Distribution Incidental Benefit Rule often enters the picture when a spousal rollover IRA is created because the couple's children are named as the primary beneficiaries of the new account. Except in second marriage situations, the oldest child (the calculation-DB of the spousal rollover IRA) will be more than ten years younger than the surviving spouse.

Once the surviving spouse attains age 70½, required distributions are computed using the "applicable divisor" listed in the Proposed Regulations under §1.401(a)(9)-2, Q-4.
Beginning in the year following the year of the surviving spouse’s death, the beneficiaries are allowed to compute minimum distributions under the §401(a)(9)(A)(ii) method that would have been used by the surviving spouse in previous years had the MDIB Rule not produced a larger distribution. [§1.401(a)(9)-2, Q-3]

While the distribution rules associated with a spousal rollover IRA may seem daunting, their appearance masks several marvelous opportunities for extended tax deferral. When required distributions begin flowing from the new IRA, it is likely that those withdrawals will occur at a slower rate than when both spouses were alive. This indirect effect of the MDIB Rule means that more assets remain inside the account for a longer period. Following the second parent's death the children gain additional stretch-out because they may begin using actual life expectancy factors rather than the artificial 10-year age spread mandated by the MDIB Rule.

Table 12 provides a representative sample of what might be accomplished in a family situation when a participant is the first to die following his or her Required Beginning Date. In addition to the assumptions listed on Table 12, the following facts and circumstances were used to create that table.

The participant’s spouse is the sole Designated Beneficiary of the qualified plan. During the years the participant lives following the RBD, a joint L.E. factor is used but only the participant’s life expectancy is redetermined (Hybrid Method).
Following the participant’s death, the spouse beneficiary moves the assets into a rollover IRA and names the couple’s children as beneficiaries of the new account.
After the subsequent death of the surviving spouse, the adult children decide to leave the funds in the rollover IRA and withdraw only the minimum required distributions so as to boost their own retirement income stream.

Table 12 shows that for the first twenty-five years the balance inside the original qualified plan and the spousal rollover IRA continues to grow despite the annual required distributions. That phenomenon is due in part to the planning decisions built into the illustration. Of course, a different interest rate assumption would shift the line higher or lower. In fact, it is possible to produce a downward sloping line if earnings fail to match or exceed the required distributions each year. However, at no point during those initial twenty-five years are MRD’s greater than 7.35% of the account balance. In the lowest year the required distribution equals a mere 4.61% of the account balance.
Worth noting is the fact that minimum distributions for the children following the demise of both parents are controlled by the election made when the surviving spouse creates the spousal rollover.

Assuming that the spousal rollover IRA does not mandate the use of a single life expectancy factor, the surviving spouse will be able to utilize a joint life expectancy. For purposes of that joint life expectancy the survivor must choose whether to redetermine his or her own life expectancy. (Of course, the life expectancy of a child or another non-spouse beneficiary cannot be determined.) Ironically, that life expectancy election by the surviving spouse has no impact whatsoever during his or her lifetime because the MDIB Rule effectively dictates that the "Applicable Divisor" must be used to compute required distributions. Once the heirs are free to disregard the MDIB Rule following the death of the surviving parent, however, the latter's decision when creating the rollover IRA becomes important.

The life expectancy of the surviving parent drops to zero in the year following his or her death if that person elected to use a redetermined L.E. factor. Therefore, the only life expectancy remaining is the unexpired portion of the calculation-BD's single life. The results obtained by following this route are plotted on Table 12 with solid squares connected by a dashed line.
In the event the surviving spouse elected a Joint Fixed-Period method to compute distributions under §401(a)(9)(A)(ii), the remaining balance of the original joint L.E. factor is available for the heirs. In all cases this factor will be slightly larger than the unexpired portion of the calculation-DB's single life and, hence, produce a bit more stretch-out. The preferred results obtained by this approach are shown on Table 12 using inverted triangles joined together by a dashed line.

While the differential may not be staggering, the right half of Table 12 shows that the heirs do gain an advantage if allowed to use the larger life expectancy factor discussed in the preceding paragraph.