Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

of the account is the earlier of the end of the year in which the first distribution would be required to be made to her under the life expectancy payout method ( ¶ 1.6.04 ) or the end of the year containing the fifth anniversary of the participant’s death. This creates a potential trap for surviving spouses of young decedents, with respect to a QRP or 403(b) plan that allows an election but provides the 5-year rule as the default election. For example, if the decedent dies after 2009 in the year he would have turned age 40, in Year 1, the election period expires in Year 6 (the year that contains the fifth anniversary of the date of death), when the decedent would have reached age 45. Under the life expectancy payout method, the surviving spouse would not have to take any RMDs until the year the decedent would have reached age 70½ (Year 30 or 31), but if she is defaulted into the 5- year rule in Year 6 then the entire remaining account balance becomes the RMD” for Year 6, and here is what will happen to her in Year 6:  If the inherited plan is a QRP or 403(b) plan, she will receive a distribution of the entire balance in Year 6. Being an RMD, this distribution will not be eligible for rollover; see ¶ 2.6.03 (E).  If the inherited plan is an IRA of which the spouse is the sole beneficiary, her failure to take the RMD in Year 6 would be deemed an election to treat the account as her own in that year; see ¶ 3.2.03 (D), #3. The election would be effective for the year in which it is made, meaning that the entire account would NOT be treated as an RMD for such year after all! See ¶ 1.6.03 (B). D. Deadline for Designated Beneficiary’s election if surviving spouse is not deemed to be the sole beneficiary is generally the end of the year after the year of the participant’s death. 1.5.08 Computing RMDs based on participant’s life expectancy This ¶ 1.5.08 explains when and how to compute RMDs using the “participant’s life expectancy” as the ADP. The Required Commencement Date for RMDs computed using the participant’s life expectancy as the ADP is the end of the year after the year of the participant’s death. Reg. § 1.401(a)(9)-2 , A-5. Exception: if the participant died in 2008 it is 12/31/2010 (see ¶ 1.1.04 ). A. When to use the participant’s life expectancy as the ADP. There are two situations in which the participant’s single life expectancy ( i.e., what would have been his life expectancy if he had not died) is the ADP for distributions to a beneficiary. Both arise only if the participant died on or after his RBD:  If the participant dies on or after his RBD with no Designated Beneficiary , the ADP is the participant’s remaining single life expectancy. Reg. § 1.401(a)(9)-5 , A- 5(a)(2). This is the “no-DB” rule that applies in cases of death on or after the RBD. ¶ 1.5.04 (E).  If the participant dies on or after his RBD leaving the benefits to a Designated Beneficiary , then the ADP is the beneficiary’s life expectancy or the participant’s life expectancy, whichever is longer . Reg. § 1.401(a)(9)-5 , A-5(a)(1). So if the Designated Beneficiary is older than the participant was, the beneficiary uses the