Chapter 1: The Minimum Distribution Rules
29
1.1.02
Which plans are subject to the RMD rules
For definitions of plans referred to in this section, see
¶ 8.3 .The minimum distribution rules are contained in
§ 401(a)(9)which applies to
Qualified
Retirement Plans (QRPs
). The Code specifies that rules “similar to” the rules o
f § 401(a)(9)shall
also apply to
IRAs
( § 408(a)(6) )and
403(b) plans
( § 403(b)(10) ).
Because the minimum distribution
regulations
were first written for QRPs, they refer to
the
participant
(the individual who earned the benefits; see p.
25)as the “employee.” The
Treasury has made the same regulations applicable (with certain variations) to IRAs. Reg.
§ 1.408- 8 ,A-1(a). When applying the QRP regulations to an IRA, “the employee” is to be read as “the
IRA owner.” Reg.
§ 1.408-8 ,A-1(b). “Simplified employee pensions” (
SEP
or
SEP-IRA
;
§ 408(k) )and
SIMPLE
IRAs
( § 408(p) )are treated the same as other IRAs for purposes of
§ 401(a)(9)and accordingly are subject to the same RMD rules and regulations as “regular”
traditional IRAs. Reg.
§ 1.408-8 ,A-2.
Roth IRAs
are subject to the IRA minimum distribution rules
only
after the participant’s
death; the lifetime RMD rules do not apply to Roth IRAs.
¶ 5.2.02 (A).
The Treasury has also made its QRP RMD regulations applicable (again with certain
variations) to
403(b) plans
. Reg.
§ 1.403(b)-6(e) .1.1.03
RMD economics: The value of deferral
The most valuable feature of traditional tax-favored retirement plans is the ability to invest
without current taxation of the investment profits. In most cases, investing through a retirement
plan defers income tax not only on the investment profits but also on the participant’s
compensation income that was originally contributed to the plan. The longer this deferral
continues, the better, because, generally, the deferral of income tax increases the ultimate value of
the benefits.
As long as assets stay in the plan, the participant or beneficiary is investing not just “his
own” money but also “Uncle Sam’s share” of the participant’s compensation and the plan’s
investment profits,
i.e.,
the money that otherwise would have been paid to the IRS (and will
eventually be paid to the IRS) in income taxes. Keeping the money in the retirement plan enables
the participant or beneficiary to reap a profit from investing “the IRS’s money” along with his
own. Once funds are distributed from the plan, they are included in the gross income of the
participant or beneficiary, who then pays the IRS its share (see
Chapter 2 ). Thereafter the
participant or beneficiary will no longer enjoy any investment profits from the government’s share
of the plan. Long-term deferral of distributions also tends to produce financial gain with a Roth
retirement plan, even though income tax is not being deferred; see
¶ 5.1.01 .Despite the apparent goal of the RMD rules (assuring that tax-favored retirement plans are
used primarily to provide retirement income),
§ 401(a)(9)permits the retirement account to stay
in existence long past the death of the participant whose work created the benefit—
if
the participant
leaves his retirement benefits to the right kind of beneficiary. If various requirements are met, the
law allows the retirement benefits to be paid out gradually, after the worker’s death, over the life
expectancy of the worker’s beneficiary.
¶ 1.5.05
. The financial benefit of the long-term deferral of