Life and Death Planning for Retirement Benefits

32 / 507

32 Life and Death Planning for Retirement Benefits
be treated for RMD purposes following the purchase. If your client is considering such a purchase,
you need to read the summary in the following paragraph, and then read the regulation or Special
Report above cited.
The defined benefit plan RMD system is briefly summarized as follows. First, the RMD
rules limit the type of annuity contract that can be purchased “inside” an IRA—basically, an
immediate annuity contract purchased inside an IRA must provide for level periodic payments (or
level plus certain permitted percentage annual increases or COLAs), beginning no later than the
age-70½ year (or year of purchase, if later). The duration of the stream of payments may be for
the life of the participant alone, or for the joint lives of the participant and his spouse-beneficiary,
or for the joint lives of the participant and his nonspouse beneficiary (with, in this last case, limits
on the size of the survivor annuity if the beneficiary is younger than the participant). The contract
can have a minimum guaranteed term, provided it does not extend beyond, roughly, the
participant’s age 97.
Finally, following the purchase of this contract inside the IRA, the annuity contract and
“the rest of the IRA” (i.e., the nonannuitized portion) are treated as two separate plans for all
purposes of the minimum distribution rules. All distributions received under the annuity contract
are considered RMDs from the “annuity” portion (so they cannot be rolled over; , and the
non-annuitized portion must pay its own RMDs computed in the usual way (excluding the annuity
contract when valuing the account).
1.2 RMD Fundamentals
This ¶ 1.2 explains the components of the minimum distribution system.
1.2.01 The 12 Fundamental Laws of the RMD Universe
1. Here are the basic principles underlying the required minimum distribution RMD) scheme
for defined contribution (DC; plans. Note that many rules have at least one
exception! RMDs start at a particular time. The starting point for lifetime required
distributions is approximately age 70½ (or upon later retirement in some cases); see
for explanation of the “first Distribution Year” and the “Required Beginning Date.” The
final Distribution Year for “lifetime” distributions is the year of the participant’s death.
A). The starting point for post-death RMDs is measured from the participant’s
death. ¶ 1.5.05(B),
2. The RMD must be taken by December 31 each year. Once RMDs begin, the participant
or beneficiary must take a distribution each and every calendar year, no later than
December 31, as long as he lives (or until the plan runs out of money). Reg.
A-1. There are several exceptions to this rule. First, the “5-year rule” does not require
annual distributions; see Second, in the case of lifetime RMDs, the distribution
for the first Distribution Year can generally be postponed until the Required Beginning
Date (RBD) (which occurs in the following year); se Third, there were no RMDs
for the year 2009; see Fourth, see D) for how to use rollovers to stop
RMDs. Finally, RMDs can be delayed beyond the normal deadline in two situations: a
review period for QDROs and (in the case of insured plans) delay caused by receivership
of the insurance company; see Reg A-7, A-8, regarding these exceptions.