For nonspousal beneficiaries, inherited IRAs are distributed over a fixed period of years. This term (often called “term certain”) is calculated to be the life expectancy of the beneficiary in the year after the owner died. For example, assume that an IRA owner passed away at age 75, with a child beneficiary that was 50 years old. In the following year, the term would be established as being 33.3 years—the single life expectancy of a 51 year old. The distribution that year would be calculated by dividing the plan balance by 33.3. In the next year, the distribution would be calculated by dividing the plan balance by 32.2. This term would just be reduced by one each year, causing the entire balance to be distributed over 33 years.
The 2002 final regulations, however, added a new wrinkle: the calculations have to be done as though the 2002 life expectancy table was used to calculate the initial length of the term. For example, under the pre-2001 regulations, the single life expectancy for a 51 year old was only 32.2 years. If the owner of a plan died in 1999 with a 50-year-old beneficiary, the life expectancy used in 2000 would have been 32.2 years. This life expectancy number would then be decreased by one each year to calculate the distribution. Because the 2002 final regulations require us to recalculate the initial term, however, the life expectancy in 2003 is not 32.2 minus 3, as we would expect. Instead, we have to recalculate the initial term using the 2002 single life expectancy table. This table gives a 51 year old 33.3 years of life expectancy, so the life expectancy used in 2003 would be 33.3 minus 3, or 30.3.
It gets more complicated than that with some beneficiary elections. The 2002 final regulations also apply the new beneficiary designation rules retroactively to past cases. If the designated beneficiary would not have been a valid beneficiary under the new rules, then the distributions have to start being calculated as if there had been no beneficiary indicated when the owner died.
