Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Switching between 5-year rule and life expectancy method

When a participant dies before his RBD ( ¶ 1.5.02 , Step 3), and his Designated Beneficiary either elects or is defaulted into the 5-year rule or the life expectancy method ( ¶ 1.5.07 ), the Designated Beneficiary generally cannot switch to the other method. The exceptions to this rule are: A. If permitted by the plan, a Designated Beneficiary can change his election prior to the deadline for making the election ( ¶ 1.5.07 (B), (C)). Reg. § 1.401(a)(9)-3 , A-4(c), third sentence. B. If a Designated Beneficiary is using the life expectancy payout method, then, unless the plan prohibits withdrawing more than the RMD (which would be rare), the beneficiary can take out the entire remaining balance at any time, including by the end of the 5-year period if all that is desired is a faster distribution. This has no effect on penalties ( ¶ 1.9.02 ) unless “C” applies. C. If there is only one Designated Beneficiary, and he withdraws all of the benefits by the end of the 5-year rule period ( ¶ 1.5.06 ), the penalty for any missed RMDs in earlier years is automatically waived, so to that limited extent a beneficiary can make a penalty-free switch from the life expectancy method to the 5-year rule even after the election deadline ( ¶ 1.5.07 (B)). Reg. § 54.4974-2 , A-7(b). It is not clear why the IRS limits this reasonable provision to the situation in which there is only one Designated Beneficiary. D. If the nonspouse Designated Beneficiary of a QRP or 403(b) plan completes a direct rollover from the inherited plan to an inherited IRA by the end of the year after the year of the participant’s death, the Designated Beneficiary can elect to use the life expectancy payout method for the “inherited” IRA, even if under the original plan he would have been required to use the 5-year rule. See ¶ 4.2.04 (J). When the participant dies, the beneficiary becomes entitled to the benefits. ¶ 1.7.02 , ¶ 4.2.01 . This ¶ 1.5.12 explains who is entitled to receive the inherited benefits if the beneficiary, having survived the participant, and thus become entitled to the benefits, later dies before having withdrawn all the benefits from the plan. The person or entity becoming entitled to the benefits upon the death of the original beneficiary is called the successor beneficiary . Reg. § 1.401(a)(9)-4 , A-4(c), § 1.401(a)(9)-5 , A- 7(c). Who the successor beneficiary is depends on the terms of the plan or IRA agreement. The IRS doesn’t really care who the account passes to at that point, since that has no effect on the ADP (see ¶ 1.5.13 ). Here are the alternatives: A. Beneficiary names successor beneficiary. Some plans and IRA providers allow the original beneficiary to name his own successor beneficiary. If the original beneficiary has Who gets the benefits when the beneficiary dies?