Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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when determining a person’s “Applicable Distribution Period” ( ¶ 1.2.03 ). For more details on how the suspension worked and its effect, see the author’s Special Report: Ancient History ( http://www.ataxplan.com ).

RMDs under DB plans and “annuitized” DC plans

Defined benefit plans are subject to an entirely different system of RMDs than the defined contribution (DC) plan system explained in this Chapter. For details on the defined benefit plan RMD system, see Reg. § 1.401(a)(9)-6 and the author’s Special Report: When Insurance Products Meet Retirement Plans ( http://www.ataxplan.com ) (included in the e-book edition of this book as Chapters 10 and 11 ). Advisors need to be aware of this alternative RMD system, even if they have nothing to do with RMD compliance for any defined benefit plan, because the defined benefit plan system also applies to any portion of a DC plan that is “annuitized.” Annuitize is a word that does not appear in the dictionary; in the IRS lexicon, it means that all or part of an individual’s account in a DC plan is used to purchase an immediate annuity. When an IRA owner buys an immediate annuity contract “inside” the IRA, the “defined benefit plan” RMD rules suddenly start applying to his IRA. These rules limit what types of annuity contract he can buy and specify how the contract (and the rest of the IRA) will be treated for RMD purposes following the purchase. If your client is considering such a purchase, you need to read the following brief summary of those rules, and then read the regulation or Special Report above cited. The RMD rules for “annuitized” IRAs (and other annuitized defined contribution plans; IRAs are discussed for convenience) limit the type of immediate annuity that can be purchased in an IRA—basically, an immediate annuity contract purchased inside an IRA must provide for level periodic payments (or level plus certain permitted percentage annual increases or cost-of-living adjustments), beginning no later than the Required Beginning Date ( ¶ 1.4.01 ) (or year of purchase, if later). The duration of the stream of payments may be for the life of the participant, or for the joint lives of the participant and his spouse-beneficiary, or for the joint lives of the participant and his nonspouse beneficiary (with, in this last case, limits on the size of the survivor annuity if the beneficiary is much younger than the participant). The contract can have a minimum guaranteed term, provided it does not extend beyond, roughly, the participant’s age 97. There is one exception to the rule that an annuity purchased inside an IRA must commence payments no later than the participant’s RBD: A “qualified longevity annuity contract” (QLAC) may start payments later, up to age 85. AQLAC allows the participant to provide an income stream for his later years. The insurance company pays him nothing until age 85. This allows the investment to grow in value prior to the delayed starting date, so the participant can insure income for his later years with a relatively smaller outlay. Up to 25 percent of the participant’s IRAs (but not more than $125,000) can be invested in this type of contract. Reg. § 1.401(a)(9)-6 , A-17.