Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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third sentence; § 1.401(a)(9)-3 , A-1(a), third sentence; § 1.401(a)(9)-5 , A-5. However, there are differences in the details. Here is what you need to know to compute RMDs for a Designated Beneficiary:  Determine the beneficiary’s life expectancy based on his age on his birthday in the year after the year of the participant’s death unless the surviving spouse is the sole beneficiary (in which case see ¶ 1.6.03 (D) instead of this section). Reg. § 1.401(a)(9)-5 , A-5(c)(1).

 The beneficiary’s life expectancy is always computed using the Single Life Table ( ¶ 1.2.03 ). Reg. § 1.401(a)(9)-5 , A-6.

 The beneficiary’s RMDs for years after the year of the participant’s death are computed using the fixed-term method ( ¶ 1.2.04 (B)), unless the surviving spouse is the sole beneficiary (in which case see ¶ 1.6.03 (D) instead of this section). Reg. § 1.401(a)(9)-5 , A- 5(c)(1), second sentence. Diane Example: Bonnie died in Year 1, leaving her IRA to her sister Diane as Designated Beneficiary. Assume that the ADP is Diane’s life expectancy (see next paragraph). Diane’s l ife expectancy is determined as of Year 2 (the year after the year of Bonnie’s death). Diane turns 46 on her birthday in Year 2, so her life expectancy (ADP) from the Single Life Table is 37.9. For calculating her RMDs for Year 3 (and later years), Diane deducts one from the prior year’s ADP, so her Year 3 divisor is 36.9, Year 4 is 35.9, and so on. She never looks at the table again after the first Distribution Year. For purposes of this particular computation, it does not matter whether Bonnie died before or after her RBD ( ¶ 1.5.02 , Step 3), provided that (if Bonnie died before her RBD) Diane either elects or is defaulted into the life expectancy payout method (see ¶ 1.5.07 ), or (if Bonnie died after her RBD) Diane is younger than Bonnie (so Diane’s life expectancy is the ADP; see ¶ 1.5.04 (C)). B. Required Commencement Date. Distributions under the life expectancy payout to a nonspouse Designated Beneficiary begin the year after the year of the participant’s death (Regs. § 1.401(a)(9)-2 , A-5; § 1.401(a)(9)-3 , A-3(a)). Thus, the Required Commencement Date for a life-expectancy-of-the-beneficiary payout is December 31 of the year after the year of the participant’s death. In addition, a distribution for the year of death itself is sometimes required (computed under a different method); see ¶ 1.5.03 (A) or ¶ 1.5.04 (A). Once the life expectancy payout begins, a distribution must be taken every year until the account has been entirely distributed. The “fundamental laws of RMDs” ( ¶ 1.2.01 ) continue to apply to the beneficiary just as they applied to the participant. C. Economic effects. Calculating RMDs by dividing an annually-revalued account balance by the beneficiary’s life expectancy tends to produce gradually increasing payments over the years, so long as the plan has a positive investment return. As long as the beneficiary’s remaining life expectancy is greater than [100/the plan’s annual growth rate], the plan balance will be growing faster than the beneficiary is withdrawing it. See ¶ 1.5.03 (A) or ¶ 1.5.04 (A) regarding the RMD for the year of Bonnie’s death.