Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

various irrevocable elections at his RBD.) For the exceptions to this rule, see ¶ 1.5.07 (if the participant dies before his RBD, leaving his benefits to a Designated Beneficiary, the beneficiary may have to elect between the life expectancy payout method and the 5-year rule) and ¶ 3.2.03 (surviving spouse may elect or be deemed to have elected to treat an inherited IRA as the spouse’s own IRA). 10. The regulations “overrule” the Code. You cannot compute RMDs simply by following the Internal Revenue Code. The IRS regulations have fundamentally altered the Code’s approach in several ways. For example, the Code dictates that lifetime distributions must be made over the life expectancy of the participant or the joint life expectancy of the participant and his beneficiary. § 401(a)(9)(A)(ii) . The regulations make the identity and life expectancy of the beneficiary almost irrelevant; see ¶ 1.3.02 . For other examples, see ¶ 1.5.04 (“General Comments”) and ¶ 1.5.07 . 11. RMDs are determined under the rules applicable to the plan that holds the benefits , not the rules applicable to some prior plan where the benefits “used to live” prior to a rollover. Reg. § 1.401(a)(9)-7 , A-2. See ¶ 1.2.06 (D). 12. Missing an RMD has consequences. A participant or beneficiary who misses an RMD becomes liable for a 50 percent “excise tax” on the missed distribution (though waiver can be obtained in some cases); see ¶ 1.9.02 . Regs. § 1.401(a)(9)-5 , A-9(a), and § 1.408-8 , A-11(a), state that, except as otherwise provided in A-9(b) or A-11(b) of such regulations, or as may later be otherwise provided by other IRS pronouncements, “all amounts distributed” from a plan or IRA during the applicable Distribution Year (or grace period; ¶ 1.4.01 ) “are taken into account in determining whether section 401(a)(9) is satisfied….” Distributions before the Distribution Year don’t count; see ¶ 1.2.01 , #8. Here is the RMD status of various other distributions: A. Distribution of an annuity contract does NOT count. When all or part of a participant’s or beneficiary’s plan account or IRA balance is used to purchase an immediate annuity, distributions under the contract must comply with RMD rules. Reg. § 1.401(a)(9)-5 , A- 1(e), § 1.401(a)(9)-8 , A-2(a)(3); see ¶ 1.1.05 . Distribution of a nonassignable immediate annuity contract that complies with the RMD rules is a nontaxable event ( ¶ 2.1.06 (G)) and does not count as a distribution for RMD purposes. Reg. § 1.401(a)(9)-8 , A-10. B. Corrective and deemed distributions do NOT count. QRP contributions that are returned to the participant because they exceeded various contribution limits do not count towards the RMD requirement. Reg. § 1.401(a)(9)-5 , A-9(b)(1)-(3). IRA contributions returned (together with the “earnings thereon”) by the extended due date of the participant’s tax return (“corrective distributions”; see ¶ 2.1.08 ) do not count. Reg. § 1.408-8 , A- 11(b)(1)-(3). Neither do plan loans that are treated as distributions due to failure to comply with the plan loan rules ( ¶ 2.1.07 (A)), or the imputed income arising from life insurance held by a plan. Reg. § 1.401(a)(9)-5 , A-9(b)(4), (6). Which distributions do or do not count towards the RMD