Life and Death Planning for Retirement Benefits

CHAPTER 1: THE MINIMUM DISTRIBUTION RULES The minimum distribution rules dictate when benefits must be distributed from a retirement plan. Minimum Distribution Road Maps How to compute RMDs during the participant’s life: ¶ 1.3.01 , p. 40. How to compute RMDs after the participant’s death: ¶ 1.5.02 , p. 50. Congress wants tax-favored retirement plans to be retirement plans, not estate-building wealth transfer vehicles. To that end, Congress enacted § 401(a)(9) , which compels certain annual distributions from plans beginning generally at age 70½ or, if earlier, death. § 401(a)(9) and its related regulations are called the “minimum distribution rules” or the RMD rules.” The “ required minimum distribution ” or RMD is the amount that must be distributed under these rules in a particular year. This Chapter explains the minimum distribution rules applicable for 2003 and later years under the IRS’s final minimum distribution regulations for defined contribution (DC) plans. See ¶ 1.1.01 regarding earlier years; see ¶ 1.1.05 regarding defined benefit plans and annuity payouts. 1.1 Introduction to the RMD Rules The major attraction of the types of retirement plans discussed in this book ( ¶ 1.1.02 ) is the ability to accumulate funds inside the plan on a tax-deferred basis (or tax-free, in the case of a “Roth” plan). The minimum distribution rules dictate when this tax-sheltered accumulation must end. § 401(a)(9) tells us when benefits must start coming out of a retirement plan, and, once forced distributions start, how much must be distributed each year. Advisors need to know the RMD rules for planning purposes because these rules set the outer limits on plan accumulations, and because failure to comply with the rules involves substantial penalties ( ¶ 1.9.02 ). The RMD rules come in two flavors: “life” (distributions required during the participant’s life; see ¶ 1.3 – ¶ 1.4 ); and “death” (distributions required after the participant’s death; see ¶ 1.5 – ¶ 1.8 ). 1.1.01 Where to find the law Congress established the required minimum distribution RMD) system in substantially its present form in the Tax Reform Act of 1986. The RMD rules are found in (the very brief) § 401(a)(9) of the Code and in the Treasury’s (very lengthy) final RMD regulations: Reg. § 1.401(a)(9)-0 through § 1.401(a)(9)-9 ; § 1.403(b)-6(e)(2) ; § 1.408-8 ; and § 54.4974-2 . The final regulations described in this Chapter apply to all DC plan participants and beneficiaries for calendar years beginning after 2002. Reg. § 1.401(a)(9)-1 , A-2(a); § 1.403(b)- 6(e)(2) ; § 1.408-8 , A-1(a). For the two versions of proposed minimum distribution regulations promulgated in earlier years, see the Special Report: Ancient History ( Appendix C ). For rules applicable to defined benefit plans ( ¶ 8.3.04 ), see ¶ 1.1.05 .