Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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Step 8: And the answer is ... The RMD for the current year is the amount determined under Step 7, or, if less, the total value of the account on the distribution date (see ¶ 1.2.05 ), unless the participant qualifies for one of two “grandfather rule” exceptions: For a QRP participant who has a pre-1984 “TEFRA 242(b) election” in effect (this is rare), see ¶ 1.4.08 . For a 403(b) participant who has a pre-1987 account balance, see ¶ 1.4.05 . Here is an example of how to compute a lifetime RMD for a participant who does not qualify for any grandfather rule exceptions, has not failed to take the RMD in any prior year, and does not have a more-than-10-years-younger spouse as his sole beneficiary: Kenny Example: Kenny turns 73 on his 2010 birthday. Under the Uniform Lifetime Table, the ADP (divisor) for age 73 is 24.7. On 12/31/09, the value of his IRA was $750,000; assume no adjustments ( ¶ 1.2.06 (A), ¶ 1.2.07 ) are required. Divide $750,000 by 24.7; the result ($30,364) is Kenny’s RMD for 2010. Kenny must withdraw $30,364 from his IRA sometime in 2010 ( i.e., after December 31, 2009, and before January 1, 2011). In 2011, Kenny will reach age 74. To compute his 2011 RMD, he will use the age 74 factor from the Uniform Lifetime Table. This will be divided into the 2010 year-end account balance to produce the 2011 RMD. This is the “recalculation method” of determining life expectancy; ¶ 1.2.04 (A). 1.3.02 The Uniform Lifetime Table: Good news for retirees The divisors in the Uniform Lifetime Table represent the joint life expectancy of a participant age 70 (or older) and a hypothetical beneficiary who is 10 years younger than the participant. T.D. 8987, 2002-1 C.B. 852, 854, “Uniform Lifetime Table.” Thus, the initial divisor under this table (for a participant age 70) is 27.4 years, which is the joint and survivor life expectancy of one person age 70 and another person age 60. The expectancy factors in the Uniform Lifetime Table are redetermined annually: The table does not start with a 27.4-year distribution period and then reduce it by one each year. If the table used such a “fixed-term method,” then all money would have to be distributed out of the plan by the time the participant reached age 97 (70 + 27). Instead, the divisor decreases by less than one most years. At age 75, the divisor is 22.9 (not 22.4), at age 89 it is 12.0 (not 8.4). The divisor never goes below 1.9, so if the participant takes only the RMD the account balance will never go to zero, regardless of how long the participant lives, unless it is wiped out by an external factor such as investment losses. In fact, depending on the rate of investment return, there may well be more in the account when the participant dies than there was when RMDs began. For example, if the participant takes only the RMD starting at age 70½, and the account has a steady six percent annual investment return, the account will have more dollars in it at his death than it did when he started taking RMDs, if he dies prior to age 89. Under this system, the life expectancy of the participant’s actual beneficiary, or whether he even has a beneficiary, are almost irrelevant (for exception see ¶ 1.3.03 ). Nevertheless, the Uniform Lifetime Table is the IRS’s way of implementing the Code’s requirement that benefits be distributed either in full on the RBD, or, “beginning not later than the required beginning date...over the life of such employee or over the lives of such employee and a designated