Life and Death Planning for Retirement Benefits

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Chapter 1: The Minimum Distribution Rules 37
1.2.05 How to determine “account balance” for RMD purposes
Each year, the RMD is determined by dividing the prior year-end account balance by the
ADP. This section explains which account balance you use and what adjustments are required. See
for how to value the account balance.
The relevant account balance for an IRA is “the account balance of the IRA as of December
31 of the calendar year immediately preceding the calendar year for which distributions are
required to be made.” Reg. A-6. In the case of a qualified retirement plan (QRP), use
“the account balance as of the last valuation date in the calendar year immediately preceding” the
Distribution Year. Reg. A-3(a).
Here are the adjustments that are required (or not allowed) with respect to this account
balance:
 The prior year-end balance must be increased by the amount of any “outstanding
rollover” (rollover in transit as of the last day of the prior year). See A).
 The prior year-end balance must be increased by the amount of any
recharacterization, in the Distribution Year, of a Roth conversion that occurred in
the prior year. See
 If any portion of the account has been converted to an immediate annuity payout
(e.g., for an IRA, via use of part of the account balance to purchase an immediate
annuity), the annuity contract and the rest of the account are considered two
separate plans for RMD purposes; see
 If the participant chooses to postpone the RMD for the first Distribution Year into
the second Distribution Year (see , the prior year-end account balance is
NOT reduced by the amount of the postponed RMD when computing the RMD
for the second Distribution Year. T.D. 8987, 2002-1 C.B. 852, 858, “Calculation
Simplification.” Regarding the possibility of a reduction of the prior year-end
account balance by the amount of any other RMDs that were missed (not
distributed) in prior years, see
 Finally, with one exception, there is no adjustment allowed for post-year-end
decreases in the value of the account, such as could occur through investment
losses, a divorce in which part of the account is transferred to the participant’s ex-
spouse, or a creditor’s seizing the account. The exception: The RMD is reduced as
necessary so that it does not exceed the entire account balance on the date of the
distribution. See #7.
Biff Example: Biff’s IRA is worth $1 million as of 12/31/05. He turns 74 in 2006, so his 2006
RMD is $42,017. In 2006, he gets divorced, and the divorce court awards Mrs. Biff half of Biff’s
IRA in a tax-free split unde so Biff’s IRA is reduced to approximately $500,000. Biff
still has to take out $42,017 in 2006. If the divorce court had awarded the entire account to Mrs.
Biff, reducing Biff’s account balance to zero before he had taken his 2006 RMD, the 2006 RMD
would be reduced to zero (every cloud has a silver lining).