Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

69

computing the penalty for missed RMDs ( ¶ 1.9.02 ) and in determining whether a distribution is eligible for rollover ( ¶ 2.6.03 ).

 The 5-year rule ceases to have any application once the participant lives past his RBD. The 5-year rule is never available as a payout option in case of death on or after the RBD. § 401(a)(9)(B)(i) . But since Roth IRAs have no RBD, the 5-year rule may apply to a Roth IRA even after the participant has passed his RBD on all his other retirement plans; ¶ 5.2.02 (B).

Life expectancy or 5-year rule: Which applies?

When a participant dies before his RBD, it appears under the Code that the 5-year rule ( ¶ 1.5.06 ) applies only if there is no Designated Beneficiary, and that the life expectancy method automatically applies if the participant left his benefits to a Designated Beneficiary. § 401(a)(9)(B)(iii) , (iv) . The regulations use a different approach. Under the regulations, the plan can permit the Designated Beneficiary of a participant who died before his RBD to choose between the 5-year rule and the life expectancy payout method. Reg. § 1.401(a)(9)-3 , A-4(c). A. Road Map: Three steps to tell whether the 5-year rule applies. Here are the steps required to determine which method (5-year rule or life expectancy of the Designated Beneficiary) applies to benefits of a decedent who died before his RBD. First determine who the beneficiary is; see ¶ 1.7.02 . Then: 1. If the participant died before his RBD with no Designated Beneficiary ( ¶ 1.7.03 ), you’re done: The 5-year rule ( ¶ 1.5.06 ) is the only distribution method available. § 401(a)(9)(B)(ii) ; see Reg. § 1.401(a)(9)-3 , A-4(a). Even in that situation, the plan may require a faster payout; see ¶ 1.5.10 . If the participant’s benefits are left to a Designated Beneficiary, proceed to Step 2. 2. The plan may provide that, even if the benefits are left to a Designated Beneficiary, the 5- year rule applies in some or all situations, with no option for the Designated Beneficiary to elect a life expectancy payout. If the plan has that rule and it applies to this beneficiary, the plan provision controls. Reg. § 1.401(a)(9)-3 , A-4(b). See ¶ 4.2.04 (J) for how to get out from under this rule. 3. A retirement plan may (but is not required to) allow a Designated Beneficiary to elect which method will apply. Reg. § 1.401(a)(9)-3 , A-4(b). If the plan permits Designated Beneficiaries to elect between the 5-year rule and the life expectancy payout, then the following three additional rules apply:

 The election becomes irrevocable by the deadline for making the election (see “B” below). Reg. § 1.401(a)(9)-3 , A-4(c), third sentence.

 The plan can provide a default rule, under which the life expectancy method or the 5 -year rule will automatically apply if the Designated Beneficiary fails to elect one method or the