Life and Death Planning for Retirement Benefits

32

Life and Death Planning for Retirement Benefits

be treated for RMD purposes following the purchase. If your client is considering such a purchase, you need to read the summary in the following paragraph, and then read the regulation or Special Report above cited. The defined benefit plan RMD system is briefly summarized as follows. First, the RMD rules limit the type of annuity contract that can be purchased “inside” an IRA—basically, an immediate annuity contract purchased inside an IRA must provide for level periodic payments (or level plus certain permitted percentage annual increases or COLAs), beginning no later than the age-70½ year (or year of purchase, if later). The duration of the stream of payments may be for the life of the participant alone, or for the joint lives of the participant and his spouse-beneficiary, or for the joint lives of the participant and his nonspouse beneficiary (with, in this last case, limits on the size of the survivor annuity if the beneficiary is younger than the participant). The contract can have a minimum guaranteed term, provided it does not extend beyond, roughly, the participant’s age 97. Finally, following the purchase of this contract inside the IRA, the annuity contract and “the rest of the IRA” (i.e., the nonannuitized portion) are treated as two separate plans for all purposes of the minimum distribution rules. All distributions received under the annuity contract are considered RMDs from the “annuity” portion (so they cannot be rolled over; ¶ 2.6.03), and the non-annuitized portion must pay its own RMDs computed in the usual way (excluding the annuity contract when valuing the account). 1.2 RMD Fundamentals This ¶ 1.2 explains the components of the minimum distribution system. 1.2.01 The 12 Fundamental Laws of the RMD Universe 1. Here are the basic principles underlying the required minimum distribution RMD) scheme for defined contribution (DC; ¶ 8.3.05 ) plans. Note that many rules have at least one exception! RMD s start at a particular time. The starting point for lifetime required distributions is approximately age 70½ (or upon later retirement in some cases); see ¶ 1.4 for explanation of the “first Distribution Year” and the “Required Beginning Date.” The final Distribution Year for “lifetime” distributions is the year of the participant’s death. ¶ 1.5.04 (A). The starting point for post-death RMDs is measured from the participant’s death. ¶ 1.5.05 (B), ¶ 1.5.06 , ¶ 1.5.08 , ¶ 1.6.04 . 2. The RMD must be taken by December 31 each year. Once RMDs begin, the participant or beneficiary must take a distribution each and every calendar year, no later than December 31, as long as he lives (or until the plan runs out of money). Reg. § 1.401(a)(9)- 5 , A-1. There are several exceptions to this rule. First, the “5-year rule” does not require annual distributions; see ¶ 1.5.06 . Second, in the case of lifetime RMDs, the distribution for the first Distribution Year can generally be postponed until the Required Beginning Date (RBD) (which occurs in the following year); see ¶ 1.4.01 . Third, there were no RMDs for the year 2009; see ¶ 1.1.04 . Fourth, see ¶ 1.2.06 (D) for how to use rollovers to stop RMDs. Finally, RMDs can be delayed beyond the normal deadline in two situations: a review period for QDROs and (in the case of insured plans) delay caused by receivership of the insurance company; see Reg. § 1.401(a)(9)-8 , A-7, A-8, regarding these exceptions.

Made with