Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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1.1.02 Which plans are subject to the RMD rules

For definitions of plans referred to in this section, see ¶ 8.3 . The minimum distribution rules are contained in § 401(a)(9) which applies to Qualified Retirement Plans (QRPs ). The Code specifies that rules “similar to” the rules of § 401(a)(9) shall also apply to IRAs ( § 408(a)(6) ) and 403(b) plans ( § 403(b)(10) ). Because the minimum distribution regulations were first written for QRPs, they refer to the participant (the individual who earned the benefits; see p. 25) as the “employee.” The Treasury has made the same regulations applicable (with certain variations) to IRAs. Reg. § 1.408- 8 , A-1(a). When applying the QRP regulations to an IRA, “the employee” is to be read as “the IRA owner.” Reg. § 1.408-8 , A-1(b). “Simplified employee pensions” ( SEP or SEP-IRA ; § 408(k) ) and SIMPLE IRAs ( § 408(p) ) are treated the same as other IRAs for purposes of § 401(a)(9) and accordingly are subject to the same RMD rules and regulations as “regular” traditional IRAs. Reg. § 1.408-8 , A-2. Roth IRAs are subject to the IRA minimum distribution rules only after the participant’s death; the lifetime RMD rules do not apply to Roth IRAs. ¶ 5.2.02 (A). The Treasury has also made its QRP RMD regulations applicable (again with certain The most valuable feature of traditional tax-favored retirement plans is the ability to invest without current taxation of the investment profits. In most cases, investing through a retirement plan defers income tax not only on the investment profits but also on the participant’s compensation income that was originally contributed to the plan. The longer this deferral continues, the better, because, generally, the deferral of income tax increases the ultimate value of the benefits. As long as assets stay in the plan, the participant or beneficiary is investing not just “his own” money but also “Uncle Sam’s share” of the participant’s compensation and the plan’s investment profits, i.e., the money that otherwise would have been paid to the IRS (and will eventually be paid to the IRS) in income taxes. Keeping the money in the retirement plan enables the participant or beneficiary to reap a profit from investing “the IRS’s money” along with his own. Once funds are distributed from the plan, they are included in the gross income of the participant or beneficiary, who then pays the IRS its share (see Chapter 2 ). Thereafter the participant or beneficiary will no longer enjoy any investment profits from the government’s share of the plan. Long-term deferral of distributions also tends to produce financial gain with a Roth retirement plan, even though income tax is not being deferred; see ¶ 5.1.01 . Despite the apparent goal of the RMD rules (assuring that tax-favored retirement plans are used primarily to provide retirement income), § 401(a)(9) permits the retirement account to stay in existence long past the death of the participant whose work created the benefit— if the participant leaves his retirement benefits to the right kind of beneficiary. If various requirements are met, the law allows the retirement benefits to be paid out gradually, after the worker’s death, over the life expectancy of the worker’s beneficiary. ¶ 1.5.05 . The financial benefit of the long-term deferral of variations) to 403(b) plans . Reg. § 1.403(b)-6(e) . 1.1.03 RMD economics: The value of deferral