Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

55

The disconnect between the first Distribution Year and the RBD ( ¶ 1.4.01 ) creates a “limbo period,” beginning January 1 of the first Distribution Year and ending on April 1 of the following year (the RBD). Odd effects occur during this limbo period: A. If the first year’s RMD is postponed , two RMDs are required in the second year. The two RMDs in the second year will have different deadlines, be based on different account balances, and use different divisors. Bernie Example: Bernie turns age 70½ in 2017, so 2017 is the first Distribution Year for his IRA. To calculate the 2017 RMD, he uses the 2016 year-end account balance and the Uniform Lifetime Table divisor for the age he attains on his 2017 birthday, which will be 70 if he was born before July 1, or 71 if he was born after June 30. He can take the 2017 RMD at any time from January 1, 2017, through April 1, 2018. There will then be another RMD for the year 2018, which must be taken between January 1, 2018, and December 31, 2018. The 2018 RMD will be based on the December 31, 2017 account balance and will use the Uniform Lifetime Table factor applicable for the age he attains on his 2018 birthday. Bernie decides to postpone the 2017 distribution until March 2018. This postponement will mean his RMDs are “bunched up” in 2018 (because he will receive two years’ distributions in that one year). It will also mean that his 2018 RMD will be larger than it would be if he took the 2017 distribution in 2017, because the prior year-end account balance used to compute the 2018 RMD will not be reduced by the amount of the 2017 RMD; see ¶ 1.2.05 . Bernie doesn’t care about these negative aspects of deferring the first year’s RMD, because he expects his other income to be much lower in 2018, so deferring the first year’s RMD will still lower his overall income taxes. B. No rollover or conversion until RMD has been taken. Even though the participant does not have to take the RMD for his first Distribution Year until April 1 of the second Distribution Year, he cannot, in the first Distribution Year (or any other Distribution Year) roll over (or convert to a Roth IRA) any funds from that plan or IRA to another plan or IRA until after he has taken the RMD for that Distribution Year; see ¶ 2.6.03 (D) and ¶ 5.2.02 (E). This rule does not apply to IRA-to-IRA transfers; see ¶ 1.2.02 (F). C. Death during the limbo period. If the participant dies on or after January 1 of the year he turns age 70½ (or retires, whichever is applicable), but before April 1 of the following year, he has died “before” his RBD and therefore the rules of § 401(a)(9)(B)(ii) , (iii) , and (iv) (life expectancy of beneficiary or 5-year rule; ¶ 1.5.03) apply to distribution of his death benefits, not § 401(a)(9)(B)(i) (the at-least-as-rapidly rule; ¶ 1.5.04 ). Reg. § 1.401(a)(9)-2 , A-6(a). What becomes of the RMDs that have “accrued” for the age 70½ and age 71½ (i f applicable) year(s) in such a case of death during the “limbo period?” Those RMDs are simply “erased.” They need not be taken at all. If “Bernie” (see “A”) had died on March 31, 2018, he would have died before his RBD. Because he died before he was required to start taking RMDs, no one has an obligation to take Bernie’s 2017 and 2018 RMDs; they vanish. Even if he had taken part or all of his 2017 and 2018 RMDs before his death, his death would still be “before” his RBD