The life expectancy we use each year to calculate your initial payment depends on the calculation method you choose. The Minimum Distribution Option offers two ways to calculate life expectancy:
- Recalculation Method
- One-Year-Less Method
Choosing the right calculation method is very important because it
determines the amount of your payments and what options will be
available to you and your calculation beneficiary (if any) in the future. |
The Recalculation Method
The Recalculation Method (available to you and a spouse calculation beneficiary) uses the actual life expectancy factor each year. You'll receive smaller annual payments than you would under the One-Year-Less Method and receive distributions over a longer period of time. The recalculation Method also allows you to convert your remaining Minimum Distribution Option accumulation to a lifetime annuity in the future.
Keep in mind that if you choose the Recalculation Method, at your death your life expectancy will become zero. This will affect future MDO payments to your spouse and will limit the distribution options available to your beneficiaries. Although this method allows the smallest payments while you and your calculation beneficiary are alive, it accelerates future payments at your and your calculation beneficiary's deaths. Besides payments being accelerated upon death, following the deaths of both you and your spouse, the recalculated life expectancies will be zero. At that time, the benefits must be paid out to your beneficiary(ies) by December 31 of the year following death.
The One-Year-Less Method
Under the One-Year-Less Method (which is available to you, and to all spouse and nonspouse calculation beneficiaries), one year is subtracted from your life expectancy each year after your initial life expectancy is calculated. If you choose this method, the effect will be the opposite of the Recalculation Method. Payments will be higher and the potential payout period will be shorter
while both you and your calculation beneficiary (if any) are alive (assuming both you and your calculation beneficiary choose the One-Year-Less Method). And if either of you die within the first few years of choosing the Minimum Distribution Option, payments to the survivor will be lower than they would have been under the Recalculation Method (assuming Minimum Distribution Option payments continue.
Another difference between the two methods is that the One-Year-Less Method does not allow you (or your calculation beneficiary) to switch your remaining Minimum Distribution Option accumulation to lifetime annuity income. So if you think you or your calculation beneficiary will eventually want to switch to a lifetime annuity income option, you should choose the Recalculation Method. However, if you choose the Recalculation Method and your calculation beneficiary chooses the One-Year-Less Method, only you can still switch to a one-life annuity. Remember that the One-Year-Less method is the only calculation method available for a nonspouse calculation beneficiary.
You are always required to select a calculation method for yourself. You only need to select a calculation method for someone else if you decide to include that person in the calculation of your payments (making him or her a calculation beneficiary). If you elect to have payments calculated using joint life expectancies, you and you rcalculation beneficiary can each choose the same or different calculation methods, subject to the limitation that only a spouse calculation beneficiary can choose the Recalculation Method.
The initial life expectancy is the same under both the Recalculation
and the One-Year-Less methods. The methods differ in how the life
expectancy is "updated" or "changed" after the first year. |
For more information on the options available from each of the calculation methods, refer to Appendix IV.
Recalculation Method Vs. One-Year-Less Method
| Recalculation | One-Year-Less |
| Availablility | Available to participant
and spouse calculation
beneficiary only | Available to participant
and any calculation
beneficiary
(spouse or non-spouse) |
Life
Expectancy | Results in reduction
of life expectancy by less
than one year each year,
set to 0 on December 31
of the year of death,
resulting in accelerated
payements for the survivor | Results in the reduction
of life expectancy by one
year each year; payments
will not be accelerated
upon death |
Duration
of Payments | Payments can last
until age 110 | Payments can last
until age 86 or longer,
depending on the size
of the accumulation
|
Payment
Amount After
First Year | Smaller MDO payment
while alive but payments
accelerate after death | Larger MDO payments
while alive but payments
do not accelerate at death |
Annuity
Conversion
Options | One-Life Annuity or
Fixed Period Annuity | Fixed Period Annuity |