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When your IRA is too big
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March 27, 2000: 10:10 a.m. ET
What to do if your required minimum distribution is more than you need
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NEW YORK (CNNfn) - A lot of people have accumulated million-dollar nest eggs thanks to the bull market, but it creates a new set of questions when you're getting ready to retire. What should you do if you actually have more money than you need and you have to start taking distributions from an IRA?
In response to a reader's question, Mark Groesbeck, a certified financial planner at Stanford Group in Houston, Texas, said you have a few different methods to keep the money in the plan.
Ask the experts a question.
At retirement, my regular IRA and rollover IRA will have more than $1.4 million. Based on family history I should live to at least 85, so I'm planning for 20 to 25 years of retirement. I calculated minimum payments and I have a lot more money than I need. Can I roll the excess money into a Roth IRA? I have seen nothing that precludes a Roth rollover from being counted as part of required regular IRA distributions. If I live beyond 95, this would have advantages for expenses. The tax-exempt Roth buildup would also help if I needed long-term nursing care. I suspect most people would spend the excess money. For me, the tax-free buildup, especially in the initial retirement years, is a real draw. I can park major savings tax-free, and it's available as needed for unexpected expenses. Now, what am I missing that would mess up this idea? I know, we should all have problems like this one.
You work hard to accumulate assets for your retirement, then at age 70-1/2 you are required to begin required minimum distributions (RMD). The RMD calculation can be based on your life expectancy only OR can be over the joint life expectancy of you and your spouse or children. Careful planning must be done with the election for the RMD, as this is a one-time election that you cannot change. The long-term impact can be dramatic for you and your heirs.
RMD can be calculated either by "recalculation" or "non-recalculation" methods. With the recalculation method, you would look at IRS life expectancy tables (See IRS Publication 939) each year to identify your life expectancy, while with non-recalculation, in future years you subtract 1 from prior year's factor.
To illustrate how an RMD is calculated an example may help. Identify your life expectancy on the IRS table. For a male age 70, the factor would be 16.0 (single life expectancy). This factor would then be divided into the prior year's ending value of all IRA and qualified plan assets. If your IRA assets totaled $1.4 million on Dec. 31, 1999, this would be divided by a life expectancy factor of 16.0 for an RMD of $87,500.
If you use a joint life expectancy figure to crunch the numbers, the withdrawal would be less. For example, if a joint life was used with a spouse age 68, the withdrawal would be reduced to $65,116.28 ($1.4 million divided by a factor of 21.5). Remember, you must take your first RMD by April 1st of the year following the year you turn age 70-1/2.
Is recalculating better than non-recalculating? It depends. If you are concerned about outliving your IRA withdrawals, then the recalculating method will spread withdrawals out over a longer period. However, if you elect to recalculate, upon death, your heirs will have to distribute 100 percent of the IRA by the end of the year following your death. (Assuming your beneficiary is not your spouse).
Also, if you elect for joint life with recalculation, if your spouse were to die first then you will need to change the following year's RMD to a single life expectancy factor. Conversely, with a non-recalculation method, your heirs can continue to withdraw money at the same rate you were taking distributions, thus creating more of a "legacy IRA". Carefully reviewing whom you name as your IRA beneficiary can have a dramatic impact on long-term value of IRA withdrawals.
According to Treasury Regulations, required minimum distributions are not eligible to be rolled over to a Roth IRA.
In summary, carefully consider whom you name as your IRA beneficiaries and what method you select for RMDs. Consult an adviser to explore the alternatives available to you on this complicated issue. 
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