Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

139

C. Participant only: Plan can assume there is no DB. The plan is not required to take into account whether a participant’s Designated Beneficiary is his more-than-10-years-younger spouse ( ¶ 1.3.03 ). For purposes of computing the portion of any distribution that will be treated as “nonrollable” because it is an RMD (and as therefore not subject to mandatory 20 percent withholding applicable to “eligible rollover distributions”), the plan is entitled to assume that the participant has no Designated Beneficiary (and therefore to distribute to the participant an RMD” computed using the Uniform Lifetime Table rather than the joint life expectancy of the participant and spouse). Reg. § 1.401(a)(31)-1 , A-18(c); § 31.3405(c)-1 , A-10. The participant can roll over the portion of such distribution that is in excess of the “true” RMD. Reg. § 1.402(c)-2 , A-15. D. Participant only: Rollovers in the age-70½ year. Another “trap” is that the participant’s first Distribution Year is not the year in which the required beginning date (RBD; ¶ 1.4 ) occurs; it is the year before the RBD. The first Distribution Year is the year the participant reaches age 70½ (or, in some cases, retires), even though the first RMD does not have to be taken until April 1 of the following year. Accordingly, any distribution received by the participant on or after January 1 of the first Distribution Year will be considered part of the RMD for that year, and thus cannot be rolled over. Reg. § 1.402(c)-2 , A-7(a), (b). For similar problems facing Roth IRA converters, see ¶ 5.2.02 (E), ¶ 5.4.02 (A). Leonard Example: Leonard turns 70½ on January 1, Year 1. On that date, he retires from his job at XYZ Corp. and asks the plan administrator of the XYZ retirement plan to send his benefits to his IRA in a direct rollover. The administrator replies that it will make a direct rollover of everything except the RMD for Year 1. Leonard is unhappy because he thought he could postpone all RMDs until his RBD in Year 2. Unfortunately for Leonard, if he insists on not taking any RMD in Year 1, then he also cannot do a rollover in Year 1. A direct rollover IS considered a “distribution” for purposes of the rule that RMDs cannot be rolled over, even though a direct rollover is NOT considered a distribution for income tax or withholding purposes! Note that if Leonard dies before April 1 of Year 2, and before removing his benefits from the retirement plan, his surviving spouse (¶ 3.2) or nonspouse Designated Beneficiary ( ¶ 4.2.04 ) could roll over Leonard’s entire account balance, because death before the RBD simply “erases” the RMD for both the first and second distribution years. ¶ 1.4.07 (C). E. Beneficiaries only: Rollover and the 5-year rule. If the 5-year rule ( ¶ 1.5.06 – ¶ 1.5.07 ) applies,100 percent of the remaining account balance becomes the RMD” in the year that contains the fifth anniversary of the participant’s death (or sixth anniversary, in the case of deaths in 2004–2009), and thus there can be no rollover in that year. However, no amount distributed prior to that year is considered an RMD, and thus there is no RMD-based restriction on rolling over distributions made prior to that year. Reg. § 54.4974-2 , A-3(c); Notice 2007-7, 2007-5 I.R.B. 395, A-17(b). F. Exceptions to the no-rollover-of RMDs rule. There are three quasi-exceptions to the no- rollover-of RMD rule: One is when a plan has an earlier required beginning date than the statute requires; see ¶ 1.4.04 . The second occurs when a surviving spouse who is named as sole beneficiary of an IRA is deemed to have elected to treat it as her own because of her failure to take an RMD as beneficiary; this rule in effect allows her to roll over that RMD in certain cases. See ¶ 3.2.03 (D)(3), ¶ 3.2.06 , ¶ 1.6.04 . Finally, it was possible to roll over