Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

In March 2010, the Treasury prepared an internal “Audit Report.” The report concluded that there is “growing noncompliance” with the minimum distribution rules (and also with the rules for IRA contributions). Extrapolating from a statistical sample, the report concluded that there were over 250,000 individuals who failed to take their minimum required distributions during the tax years 2006–2007. http://www.irs.gov/instructions/i1099gi/ar02.html#d0e640 . The auditor and the IRS management who reviewed the report agreed that a “Service-wide strategy” is needed to address retirement plan noncompliance.

Failure to take an RMD: 50% excise tax, other effects

The Code imposes an excise tax (popularly referred to as a “penalty,” although it is not technically a penalty) for failure to take an RMD. The tax is 50 percent of the amount that was supposed to be, but was not, distributed. § 4974(a) . For how to compute the excise tax, see Reg. § 54.4974-1 .

Improper rollover or Roth conversion of the RMD

If an individual rolls over his RMD or converts it to a Roth IRA, he has not made a valid rollover or Roth conversion; see ¶ 2.6.03 . He has a problem C but exactly what problem does he have? A common error in such situations is to frame the problem as “failure to take the RMD.” This characterization of the problem is erroneous. The situation involves two steps: A distribution from the first plan and a contribution to the second plan. There is no problem with the first step: As far as the IRS is concerned, the individual did take the RMD C so there is no 50% penalty involved. “...[I]f an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9) , notwithstanding the rollover.” Reg. § 1.401(a)(9)-7 , A-2; emphasis added. The mistake that needs to be cleaned up is the second step C the invalid rollover or Roth conversion. The mistake must be dealt with either is an excess IRA contribution. See ¶ 2.1.08 . The excise tax is imposed on the “payee” (nonpayee?). § 4974(a). Presumably, in the case of a single IRA left to multiple beneficiaries, each beneficiary is liable for an excise tax only to the extent he fails to take his particular share of the distribution , though there is no authority or guidance on this point. When it appears that a participant or beneficiary may owe the excise tax for past years, remember that the RMD rules have changed over the years; it may be that based the rules in effect in the applicable year the individual did NOT violate the RMD rules. To determine RMDs for 2009 and for pre-2003 years see the author’s Special Report: Ancient History (Appendix C). An individual participant or beneficiary who has failed to take an RMD (or failed to take the full amount of the RMD) must file Form 5329 for each year for which an RMD was wholly or partly missed. If he hasn’t yet filed his income tax return for the year the distribution was missed,