NEW YORK (CNNfn) - You cannot accumulate money in your IRA forever without taking distributions ... Unless you have a Roth IRA.|
Roth IRA owners can let their accounts keep on growing without ever being subject to required distributions. But traditional IRA accounts must start distributions by the Required Beginning Date, or RBD. The RBD is April 1 of the year after you turn 70-1/2.
Once you pass your RBD, your distribution method is etched in stone. It's irrevocable. This is why it's so important to carefully plan your IRA distribution method.
There are only a handful of distribution methods to choose from.
One is called the "Recalculation" method and the other is known as the "Term Certain" method.
There is a third method known as the "Hybrid" method, which is a combination of the first two.
While each option could be a column in itself to explain, generally speaking each method will determine how fast your IRA will be paid out during your life and after your death.
In the first year, the three methods distribute the same way. Term Certain gives you a guaranteed payout of a certain number of years, but it ends. Under recalculation, you could go on receiving money for the rest of your life except in the case of an early death.
Recalculation and Term Certain can produce a number of possible variations, depending upon the beneficiary and whether you select single life or joint life.
In last week's column about choosing a life expectancy, I advised you never to elect "single life." You should always elect "joint life" if you can. But if you must elect single life because of your own situation, your only choices are Recalculation or Term Certain.
If you elect joint life, you need to pick a distribution method for yourself and your beneficiary.
You'll also have more choices with Joint Life.
There are three choices every IRA owner must make: The selection of your IRA beneficiary; choosing a life expectancy and picking a distribution method. Last week's column focused on choosing a life expectancy, while the June 28 column focused on picking a beneficiary.
If you elected joint life, the distribution method you elect is based on who you name as your IRA beneficiary. There are two classes of beneficiaries. One is your spouse and the other is a non-spouse, which can be anyone else. A non-spouse can be a person, like your child, or it can be an entity such as your estate or a charity. However, only a person and qualifying trusts can be a designated beneficiary. An estate is a non-designated beneficiary.
A designated beneficiary has a life expectancy so you can choose joint life. But if you have a non-designated beneficiary, you'll have to choose single life.
If you do elect joint life and your beneficiary is your spouse, you have these four choices under the rules:
1.†††††††† Joint Term Certain - Both IRA owner and spouse/beneficiary elect Term Certain.
2.†††††††† Joint Recalculation† - Both IRA owner and spouse/beneficiary elect Recalculation.
3.†††††††† Hybrid Method - IRA owner elects Term Certain and spouse/beneficiary elects Recalculation.
4.†††††††† Hybrid Method - IRA owner elects Recalculation and the spouse/beneficiary elects Term Certain.
If you elect joint life and your designated beneficiary is a non-spouse, you have two options:
1.†††††††† Joint Term Certain - Both IRA owner and the non-spouse designated beneficiary elect Term Certain.
2.†††††††† Hybrid Method - IRA owner elects Recalculation and the non-spouse designated beneficiary elects Term Certain.
Tax laws prohibit an IRA owner from electing Recalculation for a non-spouse beneficiary. The only choice in this case is Term Certain.
Now you have the complete menu of distribution methods, but knowing what's available is just the beginning. The next step is to figure out which method is best for you and your IRA beneficiaries. That depends on numerous tax and personal factors that I'll cover in upcoming CNNfn.com columns.