Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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C. ESOP dividends do NOT count. Dividends on employer stock in an ESOP can be paid by the issuer directly to the participant or beneficiary. § 404(k) . Such dividend payments do not count towards the RMD requirement. Reg. § 1.401(a)(9)-5 , A-9(b)(5). D. Nontaxable distributions DO count . For two exceptions to this rule see “A” and “B” above. Reg. § 1.401(a)(9)-5 , A-9(a) (second sentence), § 1.408-8 , A-11(a). See PLR 9840041. The nontaxable portion of a QRP distribution is applied first to the RMD. Reg. § 1.402(c)-2 , A-8. If the RMD amount exceeds the nontaxable portion of the distribution, then the rest of the RMD is “filled up” from the taxable portion. Any balance of the taxable portion remaining after the RMD is satisfied is eligible for rollover ( ¶ 2.6.03 ). See ¶ 2.2 for how to tell what portion of a particular distribution is nontaxable. See ¶ 1.3.05 if the employee has multiple accounts in a QRP. E. Distributions in kind DO count. (For an exception to this rule see “A.”) A participant or beneficiary can take RMDs in kind as well as in cash. Plans are permitted to distribute property as well as cash. See Reg. § 1.401(a)(9)-5 , A-9(a) (third sentence); § 1.402(a)- 1(a)(1)(iii) ; Notice 89-25, 1989-1 C.B. 662, A-10; and instructions for IRS Forms 1099-R (2010), p. 7. F. Trustee-to-trustee transfers generally do NOT count. A direct transfer from one IRA to another IRA of the same type (traditional or Roth) is not treated as a distribution for purposes of fulfilling the RMD requirement. Reg. § 1.408-8 , A-8(a). Thus, the RMD with respect to the transferring IRA for the year must still be satisfied. However, since that RMD can be satisfied by a distribution from another IRA (including the transferee IRA) (see ¶ 1.3.04 ), the IRA-to-IRA transfer can be done without distributing or holding back the RMD; see ¶ 2.6.08 . For a transfer that is treated as a rollover , i.e., a direct rollover from a QRP or 403(b) plan to an IRA or Roth IRA (see ¶ 2.6.01 (C), ¶ 4.2.04 (D)), or a transfer (conversion) from a traditional IRA to a Roth IRA ( ¶ 5.4.07 ), the RMD must be distributed to the participant or beneficiary before the transfer or conversion occurs. See ¶ 2.6.03 , ¶ 5.2.02 (E). G. Payment of account expenses does not count. ¶ 8.1.04 (A). 1.2.03 Tables to determine Applicable Distribution Period (ADP) Annual RMDs are determined by dividing the prior year-end account balance by a life expectancy factor (from an IRS table) called the Applicable Distribution Period (ADP) or divisor. The term “ADP” is used to mean both, particularly, the numerical factor used as a divisor in computing the RMD for a particular year ( ¶ 1.2.01 , #3) (as in “look up the ADP for age 78 in the Uniform Lifetime Table”) and, more generally, the payout period that will apply to a particular participant or beneficiary (as in “the ADP is the oldest beneficiary’s life expectancy”; ¶ 1.7.05 (B)). There are currently three tables in use for purposes of computing RMDs. All three tables are reproduced in full in IRS Publication 590, “Individual Retirement Arrangements.” All three tables are “unisex” (life expectancy for men and women is the same). Lifetime RMDs (¶ 1.3) are calculated using either the Uniform Lifetime Table ( ¶ 1.3.02 ) or (if the participant’s sole beneficiary is his more-than-10-years-younger spouse) the Joint and