Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

 The prior year-end balance must be increased by the amount of any “outstanding rollover” (rollover in transit into the account as of the last day of the prior year). See ¶ 1.2.06 (A). Except for this adjustment for certain rollovers, the year-end account balance is not increased by contributions to the account made after the end of the year—even if the contribution is attributable to the prior year ( e.g. , a 2016 IRA contribution that is made in early 2017 as permitted by § 219(f)(3) ). Reg. § 1.408-8 , A-6, second sentence.  The prior year-end balance must be increased by the amount of any recharacterization, in the Distribution Year, of a Roth conversion that occurred in the prior year. See ¶ 1.2.07 . Note that if the participant chooses to postpone the RMD for the first Distribution Year into the second Distribution Year (see ¶ 1.4.01 ), the prior year-end account balance is NOT reduced by the amount of the postponed RMD when computing the RMD for the second Distribution Year. T.D. 8987, 2002-1 CB 852, 858, “Calculation Simplification.” Regarding the possibility of a reduction of the prior year-end account balance by the amount of any other RMDs that were missed (not distributed) in prior years, see ¶ 1.9.02 . Note also that, with one exception, there is no adjustment allowed for post-year-end decreases in the value of the account, such as could occur through investment losses, a divorce in which part of the account is transferred to the participant’s ex-spouse, or a creditor’s seizing the account. The exception: The RMD is reduced as necessary so that it does not exceed the entire account balance on the date of the distribution. See ¶ 1.2.01 , #7. Biff Example: Biff’s IRA is worth $1 million as of 12/31/15. He turns 74 in 2016, so his 2016 RMD is $42,017. In 2016, he gets divorced, and the divorce court awards Mrs. Biff half of Biff’s IRA in a tax-free split under § 408(d)(6) , so Biff’s IRA is reduced to approximately $500,000. Biff still has to take out $42,017 in 2016. If the divorce court had awarded the entire account to Mrs. Biff, reducing Biff’s account balance to zero before he had taken his 2016 RMD, the 2016 RMD would be reduced to zero (every cloud has a silver lining). This ¶ 1.2.06 explains how rollovers and plan-to-plan transfers affect application of the minimum distribution rules. See also ¶ 1.2.07 regarding recharacterization of Roth IRA conversions. For how RMDs impact rollovers, see ¶ 2.6.03 . A. Adjustment required for outstanding rollovers. You must increase the prior year-end balance ( ¶ 1.2.05 ) by any amount that was added to the account in the Distribution Year (“Year 2”) and that represented a rollover from another plan or IRA, if the amount in question was distributed from such other plan or IRA in the prior calendar year (“Year 1”). The IRS calls such rollovers that are in transit from one account or plan to another on the last day of the year “ outstanding rollovers .” the addition is valued as of the date of its receipt by the recipient plan, not as of the date of distribution. For purposes of computing RMDs for the receiving plan, the rollover amount is deemed to have been received in the prior calendar year (i.e., Year 1) and not the year it was actually received How rollovers impact calculation of RMD