Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Following the purchase of an annuity contract inside the IRA, the annuity contract and “the rest of the IRA” (i.e., the nonannuitized portion) are treated as two separate plans for all purposes of the minimum distribution rules. Reg. § 1.401(a)(9)-8 , A-3. All distributions received under the annuity contract are apparently considered RMDs from the annuity-contract portion (so they cannot be rolled over; ¶ 2.6.03 ), and the non-annuitized portion must pay its own RMDs computed in the usual way (excluding the annuity contract when valuing the account). The minimum distribution rules are not carved in stone. The law could change with the stroke of a pen. For several years, proposals have circulated in Washington, including draft legislation, that would replace the current “life expectancy payout” system applicable to death benefits ( ¶ 1.5.01 ) with a fixed five-year mandatory payout rule for retirement plan death benefits. As proposed, the five-year rule would be laden with as many as eight exceptions, including one that would “grandfather” the benefits of someone who died prior to the effective date of the new rule. It is not useful to explain rules contained in proposed legislation that may never be enacted or that might be enacted in a form different from the original proposal. Planners need to keep an eye on potential changes in the law, and always take into account the possibility that today’s useful planning device might not work next year. If there is any change in the minimum distribution rules, an update to this book will be posted at http://www.ataxplan.com . Planning for change?

1.2 RMD Fundamentals

This ¶ 1.2 explains the nuts and bolts of the minimum distribution system. You must understand these concepts before you can work with RMDs or understand the rest of this Chapter.

The 12 Fundamental Laws of RMDs

Here are the basic principles underlying the required minimum distribution (RMD) scheme for defined contribution (DC; ¶ 8.3.05 ) plans. Note that many rules have at least one exception!

1. RMDs start at a particular time. The starting point for lifetime required distributions is approximately age 70½ (or upon later retirement in some cases); see ¶ 1.4 for explanation of the “first Distribution Year” and the “Required Beginning Date.” The final Distribution Year for “lifetime” distributions is the year of the participant’s death. ¶ 1.5.04 (A). The starting point for post-death RMDs is measured from the participant’s death. ¶ 1.5.05 (B), ¶ 1.5.06 , ¶ 1.5.08 , ¶ 1.6.04 . 2. The RMD must be taken by December 31 each year. Once RMDs begin, the participant or beneficiary must take a distribution each and every calendar year, no later than December 31, as long as he lives (or until the plan runs out of money). Reg. § 1.401(a)(9)- 5 , A-1. There are several exceptions to this rule. First, the “5-year rule” does not require annual distributions; see ¶ 1.5.06 . Second, in the case of lifetime RMDs, the distribution for the first Distribution Year can be postponed until the Required Beginning Date (RBD) (which occurs in the following year); see ¶ 1.4.01 . Third, there were no RMDs for the year 2009; see ¶ 1.1.04 . Fourth, see ¶ 1.2.06 (D) for how to use rollovers to stop RMDs. Finally,