Life and Death Planning for Retirement Benefits

84

Life and Death Planning for Retirement Benefits

Josephine Example: Napoleon died, after his RBD, leaving his 401(k) plan to his younger surviving spouse, Josephine, as sole beneficiary. She is taking annual RMDs as Napoleon’s beneficiary; she did not roll over the benefits to her own retirement plan. Each year, the plan sends an RMD to Josephine based on her life expectancy (from the Single Life Table) for her attained age on her birthday in the year of the distribution (i.e., her age as of the end of each Distribution Year). Josephine turned 46 in the year after Napoleon’s death, so her “divisor” (ADP) for the first Distribution Year was 37.9. For the second Distribution Year, Josephine’s divisor is not 36.9 (37.9 minus one—as it would be under the fixed-term method; see Diane Example, ¶ 1.5.05 (A)); instead Josephine’s second year divisor is 37.0 (the life expectancy of a person age 47). Josephine, as a surviving spouse-sole beneficiary, determines her divisor each year by going back to the Single Life Table and determining her new life expectancy based on her new age (recalculation method). Note that the spouse does not have to “elect” to use the recalculation method; that’s just how her RMDs are determined. If a surviving spouse made a mistake, for example, and computed her RMDs using the fixed-term method, that would not change the amount of her actual RMD; it would just mean that she was taking larger distributions than she was required to take. If she caught her error quickly enough, she could roll the excess back into a tax-deferred account to avoid paying tax on it. ¶ 2.6.02 . E. RMDs to spouse’s successor beneficiaries. If “D” above applied during the spouse’s life, and the spouse later dies before all the benefits have been distributed to her, here is how to compute RMDs for her successor beneficiary(ies): If the participant had died before his RBD, and the surviving spouse then died before her Required Commencement Date, see ¶ 1.6.05 (C). Otherwise, the RMD for the year of her death must be paid out to the successor beneficiary to the extent the spouse had not already taken it by the time of her death, and any remaining benefits must be paid out (beginning the year after the year of the spouse’s death) over the spouse’s remaining life expectancy, using the fixed-term method ( ¶ 1.2.04 (B)). This is computed based on the age she attained (or would have attained if she had lived long enough) on her birthday in the year of her death and reduced by one year for each year thereafter. Reg. § 1.401(a)(9)-5 , A-5(c)(2). It is not clear whether this rule (successor beneficiaries take over what’s left of the surviving spouse’s life expectancy) applies even if the ADP that applied to the spouse herself was the participant’s remaining life expectancy rather than her own (see ¶ 1.5.04 (B)). If the participant dies on or after his RBD ( ¶ 1.5.04 ), the Required Commencement Date for RMDs to the surviving spouse-beneficiary is the same as the Required Commencement Date for distributions to any other beneficiary: December 31 of the year after the year of the participant’s death. Reg. § 1.401(a)(9)-2 , A-5, § 1.401(a)(9)-5 , A-5(a). As is true for other beneficiaries, the spouse as beneficiary must also withdraw, by the end of the year of the participant’s death, any part of the year-of-death RMD not distributed during the participant’s life. ¶ 1.5.04 (A). Required Commencement Date: Distributions to spouse