Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Maude Example: Maude dies in 2010, before her RBD, leaving her IRA to her estate. Because an estate is not a Designated Beneficiary ( ¶ 1.7.04 ), the 5-year rule applies. ¶ 1.5.03 (E). All amounts must be distributed out of the IRA no later than 12/31/2015. The 2009 one-year suspension of RMDs ( ¶ 1.1.04 ) has a special effect on the 5-year rule: The 5-year period “shall be determined without regard to calendar year 2009.” § 401(a)(9)(H)(ii)(II) . Effectively, the “5-year rule” becomes the “6-year rule” for beneficiaries of decedents who died in the years 2004–2009. The deadline for such beneficiaries is the end of the year that contains the sixth anniversary of the participant’s death. Claude Example: Claude died in 2006, before his RBD, leaving his IRA to his estate. Because an estate is not a Designated Beneficiary ( ¶ 1.7.04 ), the 5-year rule applied, meaning that (but for WRERA) all amounts would have had to be distributed out of the IRA no later than 12/31/2011; WRERA extended that deadline to 12/31/2012. The 5-year rule operates differently from the rest of the minimum distribution rules. Unlike all the other RMD payout methods (see ¶ 1.2.01 , #2), the 5-year rule does not require annual distributions. The only requirement is that the entire plan balance must be distributed by December 31 of the year that contains the fifth anniversary of the participant’s death (or sixth anniversary, in the case of deaths in 2004–2009). Reg. § 1.401(a)(9)-3 , A-1(a), § 54.4974-2 , A-3(c). Thus, a beneficiary taking distributions under this rule could spread them over all the years in the period (which could be up to six taxable years, in the case of deaths before 2004 or after 2009, or seven taxable years in the case of deaths in 2004–2009), or could wait until the last day of the period and take out all the money on that date, or anything in between. Here are some other points to remember regarding the 5-year rule:  Under the 5-year rule there is no RMD at all in years prior to the final year of the payout period. In the final year, the RMD is 100 percent of the account. Reg. § 54.4974-2 , A-3(c); Notice 2007-7, 2007-5 IRB 395, A-17(b). This rule is significant in connection with computing the penalty for missed RMDs ( ¶ 1.9.02 ) and in determining whether a distribution is eligible for rollover ( ¶ 2.6.03 ).  The 5-year rule ceases to have any application once the participant lives past his RBD. The 5-year rule is never available as a payout option in case of death on or after the RBD. § 401(a)(9)(B)(i) . But since Roth IRAs have no RBD, the 5-year rule may apply to a Roth IRA even after the participant has passed his RBD on all his other retirement plans; ¶ 5.2.02 (B). 1.5.07 Life expectancy or 5-year rule: Which applies? When a participant dies before his RBD, it appears under the Code that the 5-year rule ( ¶ 1.5.06 ) applies only if there is no Designated Beneficiary, and that the life expectancy method automatically applies if the participant left his benefits to a Designated Beneficiary. § 401(a)(9)(B)(iii) , (iv) . The regulations use a different approach. Under the regulations, the plan can permit the Designated Beneficiary of a participant who died before his RBD to choose between the 5-year rule and the life expectancy payout method. Reg § 1.401(a)(9)-3 , A-1. A. Road Map: Three steps to tell whether the 5-year rule applies. Here are the steps required to determine which method (5-year rule or life expectancy of the Designated

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