Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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RMDs can be delayed beyond the normal deadline in two situations: a review period for QDROs and (in the case of insured plans) delay caused by receivership of the insurance company; see Reg. § 1.401(a)(9)-8 , A-7, A-8, regarding these exceptions. 3. Each year’s RMD is determined by dividing the prior year-end account balance by a factor from an IRS table. RMDs are computed by dividing an annually-revalued account balance by an annually-declining life expectancy factor. Reg. § 1.401(a)(9)-5 , A-1(a). (Exception: This principle does not apply to post-death distributions under the 5-year rule. ¶ 1.5.06 .) This life expectancy factor is obtained from an IRS table and is called the Applicable Distribution Period ( ADP ) or divisor ; see ¶ 1.2.03 for more on the definition of these terms and where to find the IRS tables. The ADP is a divisor, not a percentage; see Kenny Example, ¶ 1.3.01 . For how to determine the account balance, see ¶ 1.2.05 . 4. There is no maximum distribution. The formula tells you the required minimum distribution. The rules impose no maximum distribution; the participant or beneficiary is always free, as far as the IRS is concerned, to take more than the minimum (but see #6). See Reg. § 1.401(a)(9)-5 , A-1(a), A-2. 5. Taking more than the required amount in one year does not give you a “credit” you can use to reduce distributions in a later year. Each year stands on its own. Reg. § 1.401(a)(9)-5 , A-2. Taking larger distributions in one year indirectly reduces later RMDs by reducing the account balance. 6. The plan is not required to offer every option the law permits. Generally, participants and beneficiaries must accept whatever distribution options the plan happens to offer, provided the plan does not call for slower distributions than the minimum distribution rules would require. See ¶ 1.5.10 . See ¶ 3.2.01 , ¶ 4.2.02 (B), and ¶ 4.2.04 for use of post-death rollovers or transfers to solve this problem (in some cases). 7. The RMD cannot exceed 100 percent of the account balance. “...[T]he required minimum distribution amount will never exceed the entire account balance on the date of the distribution.” Reg. § 1.401(a)(9)-5 , A-1(a). This rule can help if the account is “wiped out” before the RMD is taken; see ¶ 1.2.05 . 8. Distributions before the first Distribution Year don’t count. The first year for which an RMD is required is called the “first Distribution Year.” See ¶ 1.4.01 . Distributions in years prior to that year have no effect on the computation of the RMD for the first (or any other) Distribution Year (other than indirectly, by reducing the account balance). Reg. § 1.401(a)(9)-2 , A-6(a). 9. Distribution period generally does not involve an election. Generally, determination of the ADP for benefits, either during the participant’s life or after his death, does not involve an “election” on the part of the participant or beneficiary. The ADP is prescribed by law based on the identity of the participant and beneficiary. (This is in contrast to the now- obsolete 1987 proposed regulations ( ¶ 1.1.01 ), under which the participant had to make