Life and Death Planning for Retirement Benefits

CHAPTER 1: THE MINIMUM DISTRIBUTION RULES

The minimum distribution rules dictate when benefits must be distributed from a retirement plan.

Minimum Distribution Road Maps Are you just trying to figure out what distributions are required in a particular situation? Start with a Road Map:

How to compute RMDs during the participant’s life: ¶ 1.3.01 How to compute RMDs after the participant’s death: ¶ 1.5.02

Congress wants tax-favored retirement plans to be retirement plans, not estate-building wealth-transfer vehicles. To that end, Congress enacted § 401(a)(9) , which compels certain annual “required minimum distributions” (RMDs) from plans beginning generally at age 70½ or, if earlier, death. § 401(a)(9) and its related regulations are called the “minimum distribution rules” or the “RMD rules.” The “required minimum distribution ” or RMD is the amount that must be distributed under these rules in a particular year. This Chapter explains the minimum distribution rules applicable for 2003 and later years under the IRS’s final minimum distribution regulations for defined contribution plans. See ¶ 1.1.01 for other years and other types of plans. Make sure you understand the “minimum distribution fundamentals” ( ¶ 1.2 ) before tackling other parts of this Chapter.

The minimum distribution rules were “suspended” for defined contribution plans for the calendar year 2009. See ¶ 1.1.04 .

1.1 Introduction to the RMD Rules

The major attraction of the types of retirement plans discussed in this book ( ¶ 1.1.02 ) is the ability to accumulate funds inside the plan on a tax-deferred basis (or tax-free, in the case of a “Roth” plan). The minimum distribution rules dictate when this tax-sheltered accumulation must end. § 401(a)(9) tells us when benefits must start coming out of a retirement plan, and, once forced distributions start, how much must be distributed each year. Advisors need to know the RMD rules because these rules set the outer limits on plan accumulations, and because failure to comply with the rules involves substantial penalties ( ¶ 1.9.02 ). The RMD rules come in two flavors: “life” (distributions required during the participant’s life; see ¶ 1.3 – ¶ 1.4 ); and “death” (distributions required after the participant’s death; see ¶ 1.5 – ¶ 1.8 ).

Where to find the law

Congress established the required minimum distribution (RMD) system in substantially its present form in the Tax Reform Act of 1986 (P.L. 99-514). The RMD rules are found in (the very