There really is no excuse for not having a designated beneficiary, but things happen. The rules have softened the impact of having no designated beneficiary, however that still does not compare to being able to use a beneficiary’s actual life expectancy.
If there is no designated beneficiary and the IRA owner dies after his required beginning date (RBD), the longest possible distribution period for the IRA would be 15.3 years. However, that would only be the case if the IRA owner died on or after his RBD. For an IRA owner, the RBD is April 1st of the year after she turns 70½, which always falls in the second required distribution year. If the IRA owner turned 70½ years old in 2013, then her first distribution year is 2013, but her RBD is April 1, 2014, which is in the second distribution year. Death before that date means the IRA owner has died before reaching her RBD, even if she had already taken her first required distribution.
If the deceased IRA owner passed his RBD and there is no designated beneficiary, the IRA can be paid out over the remaining single life expectancy of the deceased IRAowner. 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 reducedby 1 each year, so the longest possible stretchout is 15.3 years, regardless of who ends up inheriting the IRA. It’s true that an IRA owner could be age 70 in his 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 5-year rule.
An IRA owner is 70½ years old in 2012 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 2013, which is after his RBD of April 1, 2013. If he died in 2012, his first required distribution year, he would have died beforehis 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 2013). The first post-death required distribution must be taken by the end of 2014, 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). The15.3 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 five years, but can be even less. If the IRA owner died after age 89, the remaining life expectancy would be less than five 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. Under the rules, that is the only scenario where a complete payout would be required in the year after death.