Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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The RBD for a traditional IRA is April 1 of the calendar year following the year in which the participant reaches age 70½, regardless of whether he is “retired.” Reg. § 1.408-8 , A-3. Exceptions: For certain rollover contributions, see ¶ 1.2.06 (C). Roth IRAs have no RBD. The participant is never compelled to take distributions from his Roth IRA. Minimum distribution requirements do not apply to a Roth IRA until after the participant’s death. See ¶ 5.2.02 . For a participant who is a “5-percent owner,” the RBD for a QRP is the same as the RBD for a traditional IRA ( ¶ 1.4.02 ): April 1 of the calendar year following the year in which the participant reaches age 70½, regardless of whether he is “retired.” § 401(a)(9)(C)(ii)(I) ; Reg. § 1.401(a)(9)-2 , A-2(b). As the Code puts it, the normal RBD for QRPs (later of retirement or age 70½; see ¶ 1.4.04 ) is not applicable for “an employee who is a 5-percent owner (as defined in § 416 ) with respect to the plan year ending in the calendar year in which the employee attains age 70½….” § 416(i)(1)(B)(i) defines 5-percent owner as someone who owns “ more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation, or…if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer” (emphasis added). Note that someone who owns exactly 5 percent is not a 5-percent owner—you must own more than 5 percent to be a 5-percent owner! See PLR 2005-24032 for an example of an analysis of 5-percent ownership with respect to a partner in a law firm. In determining ownership percentages under § 416 , a modified version of the “constructive ownership” rules of § 318 applies. § 416(i)(1)(B)(iii) . Under these complicated rules, a participant could be deemed, for purposes of the 5 percent test, to own stock held by various family members, trusts, estates, partnerships, or corporations; and stock options must be taken into account. Explanation of the constructive ownership rules is beyond the scope of this book. Reducing the ownership share after the age-70½ year does not change the RBD: “Once an employee is a 5-percent owner…distributions must continue to such employee even if such employee ceases to own more than 5 percent of the employer in a subsequent year.” Notice 97-75, 1997-2 CB 337, “Background.” QRPs: RBD for 5-percent owner

QRPs, cont.: RBD for non-5-percent owner

The RBD for a QRP participant who is not a “5-percent owner” is generally “April 1 of the calendar year following the later of (I) the calendar year in which the employee attains age 70½, or (II) the calendar year in which the employee retires.” § 401(a)(9)(C) . See ¶ 1.4.03 for the definition of “5-percent owner.” See ¶ 1.4.06 for the meaning of “retires.” Note the following:

 A QRP participant who filed a pre-1984 “TEFRA 242(b) election” (rare) may have a later RBD than that specified in § 401(a)(9)(C) ; see ¶ 1.4.08 .