Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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1.2.05 How to determine “account balance” for RMD purposes Each year, the RMD is determined by dividing the prior year-end account balance by the ADP. This section explains which account balance you use and what adjustments are required. See ¶ 1.2.08 for how to value the account balance. The relevant account balance for an IRA is “the account balance of the IRA as of December 31 of the calendar year immediately preceding the calendar year for which distributions are required to be made.” Reg. § 1.408-8 , A-6. In the case of a qualified retirement plan (QRP), use “the account balance as of the last valuation date in the calendar year immediately preceding” the Distribution Year. Reg. § 1.401(a)(9)-5 , A-3(a). Here are the adjustments that are required (or not allowed) with respect to this account balance:  The prior year-end balance must be increased by the amount of any “outstanding rollover” (rollover in transit as of the last day of the prior year). See ¶ 1.2.06 (A). The prior year-end balance must be increased by the amount of any recharacterization, in the Distribution Year, of a Roth conversion that occurred in the prior year. See ¶ 1.2.07 .  If any portion of the account has been converted to an immediate annuity payout ( e.g. , for an IRA, via use of part of the account balance to purchase an immediate annuity), the annuity contract and the rest of the account are considered two separate plans for RMD purposes; see ¶ 1.1.05 .  If the participant chooses to postpone the RMD for the first Distribution Year into the second Distribution Year (see ¶ 1.4.01 ), the prior year-end account balance is NOT reduced by the amount of the postponed RMD when computing the RMD for the second Distribution Year. T.D. 8987, 2002-1 C.B. 852, 858, “Calculation Simplification.” Regarding the possibility of a reduction of the prior year-end account balance by the amount of any other RMDs that were missed (not distributed) in prior years, see ¶ 1.9.02 .  Finally, with one exception, there is no adjustment allowed for post-year-end decreases in the value of the account, such as could occur through investment losses, a divorce in which part of the account is transferred to the participant’s ex- spouse, or a creditor’s seizing the account. The exception: The RMD is reduced as necessary so that it does not exceed the entire account balance on the date of the distribution. See ¶ 1.2.01 , #7. Biff Example: Biff’s IRA is worth $1 million as of 12/31/05. He turns 74 in 2006, so his 2006 RMD is $42,017. In 2006, he gets divorced, and the divorce court awards Mrs. Biff half of Biff’s IRA in a tax-free split under § 408(d)(6) , so Biff’s IRA is reduced to approximately $500,000. Biff still has to take out $42,017 in 2006. If the divorce court had awarded the entire account to Mrs. Biff, reducing Biff’s account balance to zero before he had taken his 2006 RMD, the 2006 RMD would be reduced to zero (every cloud has a silver lining). 