Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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brief) § 401(a)(9) of the Code and in the Treasury’s (very lengthy) final RMD regulations: Reg. § 1.401(a)(9)-0 through § 1.401(a)(9)-9 ; § 1.403(b)-6(e) ; § 1.408-8 ; § 1.408A-6 , A-14, A-15; § 54.4974-1 and § 54.4974-2 . Reg. § 1.402(c)-2 , answers A-3(b)(2), A-7, and A-8, also bear on RMDs. The final regulations described in this Chapter apply to all defined contribution (DC) plan participants and beneficiaries for calendar years beginning after 2002. Reg. § 1.401(a)(9)-1 , A- 2(a); § 1.403(b)-6(e)(2) ; § 1.408-8 , A-1(a). For the two versions of proposed minimum distribution regulations promulgated in earlier years, see the author’s Special Report: Ancient History ( http://www.ataxplan.com ).

Which plans are subject to the RMD rules

For definitions of plans referred to in this section, see ¶ 8.3 .

The minimum distribution rules are contained in § 401(a)(9) , which applies to Qualified Retirement Plans (QRPs) . The Code specifies that rules “similar to” the rules of § 401(a)(9) shall also apply to IRAs ( § 408(a)(6) ) and 403(b) plans ( § 403(b)(10) ). Because the minimum distribution regulations were first written for QRPs, they refer to the participant (the individual who earned the benefits), as the “employee.” The Treasury has made the same regulations applicable (with certain variations) to IRAs. Reg. § 1.408-8 , A-1(a). When applying the QRP regulations to an IRA, “the employee” is to be read as “the IRA owner.” Reg. § 1.408-8 , A-1(b). “Simplified employee pensions” ( SEP or SEP-IRA ; § 408(k) ) and SIMPLE IRAs ( § 408(p) ) are treated the same as other IRAs for purposes of § 401(a)(9) , and accordingly are subject to the same RMD rules and regulations as “regular” traditional IRAs. Reg. § 1.408-8 , A-2.

Roth IRAs are subject to the IRA minimum distribution rules only after the participant’s death; the lifetime RMD rules do not apply to Roth IRAs. ¶ 5.2.02 (A).

Reg. § 1.403(b)-6(e)(2) provides that the IRA minimum distribution regulations are also used to determine RMDs under 403(b) plans , except as otherwise provided in Reg. § 1.403(b)- 6(e) .

RMD economics: The value of deferral

The most valuable feature of traditional tax-favored retirement plans is the ability to invest without current taxation of the investment profits. In most cases, investing through a retirement plan defers income tax not only on the investment profits but also on the participant’s compensation income that was originally contributed to the plan. The longer this deferral continues, the better, because, generally, the deferral of income tax increases the ultimate value of the benefits.