Life and Death Planning for Retirement Benefits

Chapter 1: The Minimum Distribution Rules

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(computed under a different method); see ¶ 1.5.03 (A) or ¶ 1.5.04 (A). Once the life expectancy payout begins, a distribution must be taken every year (except 2009; see “D”), until the account has been entirely distributed. The “fundamental laws of RMDs” ( ¶ 1.2.01 ) continue to apply to the beneficiary just as they applied to the participant. C. Economic effects. Calculating RMDs by dividing an annually-revalued account balance by the beneficiary’s life expectancy tends to produce gradually increasing payments over the years, so long as the plan has a positive investment return. As long as the beneficiary’s remaining life expectancy is greater than [100/the plan’s annual growth rate], the plan balance will be growing faster than the beneficiary is withdrawing it. For example, if the plan is growing at eight percent per year, “100” divided by “growth rate” (100/8) equals 12.5; if the beneficiary’s life expectancy is 20 years, the first year’s RMD (1/20th, or 5%), is less than the plan’s earnings for the year (1/12.5, or 8%), so the plan is growing at a faster rate than the RMDs are depleting it. Eventually the beneficiary’s life expectancy is reduced to the point that he is withdrawing more than the year’s investment return. If the plan is growing at 8 percent per year, the crossover point would be reached 12.5 years before the end of the payout period. Even after this crossover point, the RMDs tend to keep getting larger; though the plan balance is now shrinking, the fraction applied to it grows larger. Under the fixed-term method, the distribution period runs out eventually. The final RMD for “Diane” (see “A” above) will occur in the 38th year after Bonnie’s death and will wipe out the remaining balance of the account. Thus, even though Diane may live more than 37.9 years after Bonnie’s demise, her inherited IRA will run out of money no later than 2042. D. Effect of one-year suspension of RMDs. A beneficiary did not have to take the RMD that would normally have been required for the year 2009; see ¶ 1.1.04 . The suspension of RMDs for 2009 does not affect the calculation of RMDs for 2010 or any other later year (other than indirectly, by possibly increasing the account balance). For example, a beneficiary’s life expectancy is computed based on his age in the year after the year of the participant’s death (see “A” above) even if that year was 2009. See IRS Publication 590, IRAs (2009), first example under “What Age(s) Do You Use With the Table(s)?”, p. 37. If 2009 would have been the final year of the beneficiary’s life expectancy payout, presumably the beneficiary had to withdraw 100 percent of the account no later than the end of 2010, rather than December 31, 2009, but there is no guidance on this point. 1.5.06 Death before the RBD: The 5-year (sometimes 6-year) rule This ¶ 1.5.06 explains how to compute RMDs using the “ 5-year rule .” The 5-year rule is the “no-DB rule” that applies in cases of death prior to the RBD: If the participant died prior to his RBD, and had no Designated Beneficiary, this is the rule under which RMDs are computed. See ¶ 1.5.03 (E). But the 5-year rule can also sometimes apply even when there is a Designated Beneficiary; see ¶ 1.5.07 . Computing RMDs under the 5-year rule is very easy: All benefits must be distributed no later than December 31 of the year that contains the fifth anniversary of the participant’s date of death. Reg. § 1.401(a)(9)-3 , A-2.