Life and Death Planning for Retirement Benefits

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Chapter 1: The Minimum Distribution Rules 47
The meaning of “the calendar year in which the employee retires” (see
is not always obvious. We do know that “retirement” means retirement “from employment with
the employer maintaining the plan.” Reg. A-2(a); Reg.
Emphasis added. It is not known whether retirement always means “separation from service” or
whether some reduction of hours worked or responsibilities could be considered “retirement.”
Neither the regulations, nor any IRS Publication, nor Notice 97-75, 1997-2 C.B. 337 (which
provides guidance to employers on the tax law changes made by the Small Business Jobs
Protection Act of 1996) says anything on this point. Also, the statute reads as though there is only
one “retirement” per employee; it is not known whether re-employment could “cancel” retirement,
allowing RMDs to be discontinued until the employee retires again.
1.4.07 RBD versus first Distribution Year: The limbo period
The disconnect between the first Distribution Year and the RBD creates a “limbo
period,” beginning January 1 of the first Distribution Year and ending on the RBD. Odd effects
occur during this limbo period:
A. If the first year’s RMD is postponed, two RMDs are required in the second year (unless
the second year was 2009; see A)). The two RMDs in the second year will have
different deadlines, be based on different account balances, and use different divisors.
Bernie Example: Bernie turns age 70½ in 2007, so 2007 is the first Distribution Year for his IRA.
To calculate the 2007 RMD, he uses the 2006 year-end account balance and the Uniform Lifetime
Table divisor for the age he attains on his 2007 birthday, which will be 70 if he was born before
July 1, or 71 if he was born after June 30. He can take the 2007 RMD at any time from January 1,
2007, through April 1, 2008. There will then be another RMD for the year 2008, which must be
taken between January 1, 2008, and December 31, 2008. The 2008 RMD will be based on the
December 31, 2007 account balance and will use the Uniform Lifetime Table factor applicable for
the age he attains on his 2008 birthday.
B. No rollover or conversion until RMD has been taken. Even though the participant does
not have to take the RMD for his first Distribution Year until April 1 of the second
Distribution Year, he cannot, in the first Distribution Year (or any other Distribution Year)
roll over (or convert to a Roth IRA) any funds from that plan or IRA to another plan or
IRA until after he has taken the RMD for that Distribution Year; see D) and
E). This rule does not apply to IRA-to-IRA transfers ; see F).
C. Death during the limbo period. If the participant dies on or after January 1 of the year he
turns age 70½ (or retires, whichever is applicable), but before April 1 of the following year,
he has died “before” his RBD and therefore the rules of and
(life expectancy of beneficiary or 5-year rule; apply to distribution of his death
benefits, no (the at-least-as-rapidly rule; . Reg.
A-6.
What becomes of the RMDs that have “accrued” for the age 70½ and age 71½ (if
applicable) year(s) in such a case of death during the “limbo period?” Those RMDs are simply
“erased.” They need not be taken at all. If “Bernie” (see “A”) had died on March 31, 2008, he
would have died before his RBD. Because he died before he was required to start taking RMDs,
no one has an obligation to take Bernie’s 2007 and 2008 RMDs; they vanish. Even if he had taken