Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

For example, if the plan is growing at eight percent per year, “100” divided by “growth rate” (100/8) equals 12.5; if the beneficiary’s life expectancy is 20 years, the first year’s RMD (1/20th, or 5%), is less than the plan’s earnings for the year (1/12.5, or 8%), so the plan is growing at a faster rate than the RMDs are depleting it. Eventually the beneficiary’s life expectancy is reduced to the point that he is withdrawing more than the year’s investment return. If the plan is growing at 8 percent per year, the crossover point would be reached 12.5 years before the end of the payout period. Even after this crossover point, the RMDs tend to keep getting larger; though the plan balance is now shrinking, the fraction applied to it grows larger. Under the fixed-term method, the distribution period runs out eventually. The final RMD for “Diane” (see “A” above) will occur in the 38th year after Bonnie’s death and will wipe out the remaining balance of the account—even though Diane may live more than 37.9 years after Bonnie’s demise. This ¶ 1.5.06 explains how to compute RMDs using the “ 5-year rule .” The 5-year rule is the “no-DB rule” that applies in cases of death prior to the RBD: If the participant died prior to his RBD, and had no Designated Beneficiary, this is the rule under which RMDs are computed. See ¶ 1.5.03 (E). But the 5-year rule can also sometimes apply even when there is a Designated Beneficiary; see ¶ 1.5.07 . Computing RMDs under the 5-year rule is very easy: All benefits must be distributed no later than December 31 of the year that contains the fifth anniversary of the participant’s date of death. Reg. § 1.401(a)(9)-3 , A-2. Maude Example: Maude dies in 2016, before her RBD, leaving her IRA to her estate. Because an estate is not a Designated Beneficiary ( ¶ 1.7.04 ), the 5-year rule applies. ¶ 1.5.03 (E). All amounts must be distributed out of the IRA no later than 12/31/2021. The 5-year rule operates differently from the rest of the minimum distribution rules. Unlike all the other RMD payout methods (see ¶ 1.2.01 , #2), the 5-year rule does not require annual distributions. The only requirement is that the entire plan balance must be distributed by December 31 of the year that contains the fifth anniversary of the participant’s death. Reg. § 1.401(a)(9)-3 , A-1(a), § 54.4974-2 , A-3(c). Thus, a beneficiary taking distributions under this rule could spread them over all the years in the period (which could be up to six taxable years), or could wait until the last day of the period and take out all the money on that date, or anything in between. Death before the RBD: The 5-year rule

Here are some other points to remember regarding the 5-year rule:

 Under the 5-year rule there is no RMD at all in years prior to the final year of the payout period. In the final year, the RMD is 100 percent of the account. Reg. § 54.4974-2 , A-3(c); Notice 2007-7, 2007-1 CB 395, A-17(b). This rule is significant in connection with