Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

distributions permitted by the minimum distribution rules puts a premium on naming a beneficiary who will qualify for the life expectancy payout method. Depending on investment returns, if the beneficiary is young, and takes no more than the RMD each year, the value of the inherited plan can soar, under the life expectancy payout method, by the time the beneficiary reaches retirement age. For example, a 38 year-old beneficiary who inherits a $500,000 traditional IRA and withdraws it using the life expectancy method will have $1,696,000 inside the IRA plus $1,432,000 outside the IRA in 30 years; if he cashes out the entire account when he inherits it, he will have (outside the IRA) only $1,470,000. This example assumes an 8% constant investment return for all assets and a 36% tax rate on all plan distributions and outside investment income; projections were prepared using Brentmark Retirement Plan Analyzer® and NumberCruncher® software ( Appendix C ). Deferring income taxes is not always beneficial. See ¶ 5.8.02 . 1.1.04 WRERA suspended RMDs for 2009 The “Worker, Retiree, and Employer Recovery Act of 2008” (WRERA) amended § 401(a)(9) by adding the following new subparagraph (H), entitled “Temporary waiver of required minimum distribution”: “The requirements of ...[ § 401(a)(9) ] shall not apply for calendar year 2009 to” any defined contribution plan under § 401(a) , § 403(a) or § 403(b) ; any governmental 457 plan; or “an individual retirement plan” (IRA). Notices 2009-9 , 2009-5 IRB 419, and 2009- 82 , 2009-41 IRB 491, provide guidance on § 401(a)(9)(H) . Thus, anyone who otherwise would have been required to take a distribution from one of these types of plans in 2009—whether participant or beneficiary—could skip a year. Throughout this Chapter, though it may not be mentioned every single time, bear in mind that there was no RMD “for” the year 2009, and that:  The one-year suspension generally did not change how post-2009 RMDs are calculated. It did not extend lifetime or post-death life expectancy payouts, or somehow cause the year 2009 to “drop out” of the calculations when determining a person’s “Applicable Distribution Period” ( ¶ 1.2.03 ). For example, a participant who is taking lifetime RMDs ( ¶ 1.3 ) will use his actual attained age in 2010 to compute the 2010 RMD, just as would have been the case if 2009 had been a “normal” year; he will not use his 2009 age for 2010, as if 2009 somehow did not exist. See IRS Publication 590, IRAs (2009), Examples 1 and 2 (p. 34); see also ¶ 1.5.05 (D). For the one exception to this statement see the “5-year rule,” ¶ 1.5.06 .  WRERA has the effect of extending certain deadlines by one year, namely the deadlines for: Distributions under the “5-year rule” for beneficiaries of decedents who died (before their Required Beginning Dates (RBDs)) in the years 2004–2009 (see ¶ 1.5.06 ); the Designated Beneficiary of a participant who died before his RBD to elect between a life expectancy payout and the 5-year rule ( ¶ 1.5.07 (B), (C)); and the nonspouse Designated Beneficiary of a participant who died before his RBD to qualify for a life expectancy payout by completing a direct rollover of inherited benefits, to an “inherited IRA,” from a plan under which the 5-year rule applied ( ¶ 4.2.04 (J)).