©  George H. Coughlin II  2002  All Rights Reserved          Return to Home Page

The following discussion covers various tax rules relating to required distributions from IRA's, qualified retirement plans and TSA's. The text is identical to the comments in the first part of Financial and Estate Planning Implications of the Minimum Distribution Rules:  Turning Quicksand Into Terra Firma. After completing the Rules of the Road, readers may wish to peruse two other pages on this web site. One is entitled "Planning Pointers" and the other is "Practical Considerations".  The former provides important reminders to individual participants, their beneficiaries and planning professionals. The latter reviews the impact of the tax rules on individuals and their heirs.

Disclaimer

Readers must take note that information presented in this document reflects the author’s attempt to describe various points of the Federal tax law.  Some important topics have been omitted.  Keep in mind that state tax laws may differ from the Federal rules.  While every effort has been made to accurately report the provisions of the Internal Revenue Code and the Regulations pertaining thereto, it is possible that a misrepresentation has occurred.  Naturally, the Code and Regulations control the tax treatment of any situation, not the author’s interpretation.  Therefore, taxpayers should rely on the tax law rather than positions put forth in this paper.

George Coughlin is NOT responsible for, and cannot control the content of, the material listed in “Other Resources” below.  In fact, those reference items, software programs and web sites may provide incorrect information, produce inaccurate results or make false statements.   Furthermore, any investment or insurance advice as well as recommendations to purchase or sell securities you receive from a resource listed on IRAplanning.com does NOT involve George Coughlin or his broker/dealer ePLANNING Securities, Inc.  Please use appropriate caution.

Old Rules of the Road

Why Were The Minimum Distribution Rules Created?

Simply put, money set aside and accumulated in qualified plans is granted favorable tax treatment with the expectation that it will be used for retirement income purposes. To curtail one potential abuse of that opportunity, Congress decided to set duration limits on the tax deferral aspect of all qualified retirement plans. IRC §401(a)(9) is the mechanism to accomplish that objective. Under the guidelines contained in that paragraph, everyone is forced to begin making withdrawals at a prescribed level from all their retirement plans at a specified date even if they do not need the extra revenue and/or would prefer to leave the capital in their respective plans.

Please note that throughout this text the expression "qualified plan(s)" is used to denote pension plans, profit sharing plans -- including those under §401(k), stock bonus plans, traditional IRA’s under IRC §408, Roth IRA’s under IRC §408A and tax sheltered annuities under IRC §403(b). Whenever IRC §401(a)(9) does not apply uniformly to all six entities, the exception will be noted. None of the comments on these pages address the application of IRC §401(a)(9) to so-called Section 457 Plans for government workers.

It is important to remember that the newly enacted Roth IRA provides several significant exemptions from IRC §401(a)(9). The first is an avoidance of required distributions during the owner’s lifetime. That is to say, Roth IRA’s are immune from IRC §401(a)(9)(A). They are also exempt from the Minimum Distribution Incidental Benefit provisions of IRC §401(a). Furthermore, Roth IRA’s are not impacted by IRC §401(a)(9)(B)(i) when the owner dies. Instead, beneficiaries need only adhere to the relatively straightforward procedures of IRC §401(a)(9)(B)(ii) and (iii). Essentially, those are the same rules that apply to non-spouse beneficiaries when traditional IRA owners die before their required beginning date. That means beneficiaries have only one set of rules to follow regardless of the age of the Roth IRA owner on his/her date of death.

When Do Those Rules Come Into Play?

The minimum distribution rules are best known for their impact on taxpayers that have reached age 70½. Those are the so-called "living" requirements. However, they have an equally important impact following the death of the plan participant, regardless of that person's age.

1. Unless a limited exception applies (see Required Beginning Date), the "living" aspects of the required distribution provisions found in IRC §401(a)(9)(A) kick into gear during the year a participant reaches age 70½.
1. Technically speaking, the distribution for the initial year may be delayed until April 1 of the year following the year in which someone attains age 70½. That date is referred to as their required beginning date or RBD. [§401(a)(9)(C)] A complete definition of RBD, including an exception for certain participants, is provided later in this document.
2. If the taxpayer elects to delay making the first year’s minimum withdrawal until sometime between January 1 and April 1 of the year after they reach age 70½, they are still required to make a minimum distribution from their qualified plan in the year they reach age 71½. Therefore, the election to delay the first year’s payment forces two taxable distributions to occur in a single year -- the year they turn age 71½. [§1.401(a)(9)-1, F-1,(c)]
3. The rules outlined in the previous paragraph also apply to a select group of participants who may delay their RBD until the year after they retire, if retirement follows the year they attain age 70½. (For more details, please refer to the discussion entitled "Required Beginning Date".) Those special retirees must take a required distribution from their plan for the year in which they retire. That distribution for the initial year may be delayed until April 1 of the year following the year they retire. Such a delay, however, does not relieve the participant of the need to also take a minimum required distribution for the year following their retirement.
4. A further delay is possible for the pre-1987 portion of tax sheltered annuity plans covered under IRC §403(b). Please note, however, that all post-1986 earnings and contributions are subject to the normal required distribution rules. [§1.403(b)-2, Q&A-2(a)] 

2. The same paragraph of the Internal Revenue Code also stipulates the minimum distributions that must be carried out following the death of a participant. The postmortem rules break down into two subcategories depending on when the participant dies.
1. If the decedent passes away on or after the RBD, his/her assets remaining in the qualified plan must be distributed at least as rapidly as under the METHOD of distribution being used to satisfy the MRD rules on the date of the participant’s death. [§401(a)(9)(B)(i)]
2. If death takes place before the required beginning date, a beneficiary is allowed to withdraw the assets at anytime during the period that ends on December 31 of the fifth year following the year of the participant’s death. [§401(a)(9)(B)(ii)]
1. There is a general exception to the Five-Year Rule available for any portion of the participant’s interest in the account payable to someone who qualifies as a "Designated Beneficiary". A "DB" may elect to pull out his or her share of the plan assets over a longer time period provided certain prerequisites are met. For example, the tax code allows one heir in a group of Designated Beneficiaries to receive his/her share of the plan over the life expectancy of the oldest DB even though the other members in the group take 100% of their share immediately. [§401(a)(9)(b)(iii)]
2. The spousal exception to the Five-Year Rule offers a surviving spouse even greater flexibility than the general exception. [§401(a)(9)(b)(iv)] 
3. The flow chart on Table 2 entitled "Tax Rules Governing Postmortem Distributions From Qualified Plans" summarizes the preceding points.

What Is The Annual Minimum Required Distribution During Your Lifetime?

Please remember that a minimum required distribution is exactly what the title states. It is only a minimum. [§1.401(a)(9)-1, F-1(a)] Taxpayers are free to withdraw a greater amount anytime they wish. Regrettably, an excess taken out one year may not be used to offset a portion of the required amount in a future year. [§1.401(a)(9)-1, F-2] Roth IRA owners need not make required distributions during their lifetime. [§401A(c)(5)(A)]

1. The mathematical formula for calculating minimum required distributions in any given year is relatively straightforward.
1. MRD = Market Value on Preceding December 31 ¸ Life Expectancy Factor
2. Table 1A of the attached illustrations entitled "Calculating Minimum Required Distributions At Age 70½ and Beyond" provides an example based on the Dual Redetermined joint life expectancy of a married couple using their attained ages each year. 
3. Table 1B of the attached illustrations entitled "Calculating Minimum Required Distributions At Age 70½ and Beyond" provides an example based on a Joint Fixed-Period method of determining life expectancy. 
2. Keep in mind that aggregation rules are available for required distributions from multiple IRA’s and Tax Sheltered Annuities. Unfortunately, pension, profit sharing and stock bonus plans are NOT eligible for this benefit. [Revenue Notice 88-38]
1. This means a taxpayer with three IRA’s could pull the sum of the MRD’s individually computed for each of the three accounts entirely from the lowest yielding IRA rather than pro rata from all three. The same would be true if the client had a trio of TSA’s.
2. It is not permissible to take IRA minimum required distributions from a low yielding TSA or vice versa.

Unfortunately, a taxpayer must sift through a number of potentially confusing variables before it is possible to know the proper life expectancy factor to use. The optimum path through that decision tree is often controlled more by estate planning considerations than income tax planning. The following list of considerations serves as an effective road map to begin the process.

1. Please remember that this planning is important even though you have decided to withdraw more than your minimum required distributions each year.
1. There is an immediate impact if you do wish to minimize your taxable distributions.
2. Furthermore, there are significant tax ramifications for your heirs regardless of the level of withdrawals during your lifetime.
2. What is your family situation?
1. Are you married, divorced, widowed or never married?
2. Are there children or grandchildren to whom you would like to leave the residual of your qualified plans?
3. Will a sister, brother, niece or nephew be your beneficiary?
3. Will family members receive their beneficial share of the qualified plans outright or will the assets in those plans pass into a trust after you die?

4. Is there a Designated Beneficiary (DB) for each of your qualified plan account?
1. If the Designated Beneficiary is not your spouse, what is the age difference between the you and the DB?
2. If the original DB has been replaced, is the new DB older than the original Designated Beneficiary?
3. Was the replacement of the original DB brought about by the death of that individual?
5. What are the provisions in each of your plan documents concerning distribution options following the participant’s death?
1. If death occurs before the required beginning date, will the restrictions in those plans compliment or defeat your desires and the wishes of your beneficiaries?
2. If the participant dies on or after the required beginning date, are the postmortem distribution options available in your qualified plans less flexible than the tax rules?
6. What are the provisions in each of your plan documents concerning redetermination of the participant’s life expectancy each year?
1. If a plan document allows a participant to annually redetermine his/her life expectancy, must an election be filed with the plan administrator or is the redetermination mandatory?
2. Has such an election been filed with each of your plan administrators?
3. Can you opt not to redetermine life expectancy?
7. Is there a chance that your ultimate heirs may want to prolong tax deferral?

 

Technical Terms And Concepts You Need To Understand

When Congress and the IRS wrote the rules of the road, the notion of "tax simplification" was ignored. To be an effective navigator, it is necessary to grasp a few definitions and general ideas before leaving your driveway for a trip across town.

1. Required Beginning Date (RBD): All IRA owners as well as participants in qualified retirement plans that own more than five percent of the sponsoring employer must begin distributions no later than April 1 of the year following the year in which the participant attains age 70½. The RBD for all other employees and §403(b) plan participants is April 1 of the calendar year following the later of either: (1) the calendar year in which the employee attains age 70½, or (2) the calendar year in which the employee retires. [§401(a)(9)(C)] Note, however, that under Revenue Notice 97-75 a plan may elect to use the RBD rules mandated for IRA’s, i.e., April 1 of the year following the year the employee attains age 70½. Therefore, it is necessary to determine if such an election has been made for the plan in question before it is possible to be certain about the required beginning date for its participants. It is also important to keep in mind that the special rule for extending the RBD only applies to qualified plans and §403(b) plans maintained by the participant’s current employer. The RBD rules for all plans associated with a former employer are the same as for IRA’s.

2. Life Expectancy Factor (LEF): Except for MDIB purposes (see paragraph "E" below), the life expectancy factor must be computed by using the "expected return multiples" listed on Tables V or VI of Regulation §1.72-9. [§1.401(a)(9)-1, E-3 & E-4] Excerpts of those tables are included in Appendix E of IRS Publication 590. Note, however, that in the latter publication the tables are numbered I and II respectively.

3. Designated Beneficiary (DB): It is possible to name a beneficiary for a qualified plan but NOT have a "Designated Beneficiary". (See paragraph "H" below for examples of those exceptions.)
1. The "designation" must be spelled out in the plan itself or with an affirmative election by the plan participant. [§1.401(a)(9)-1, D-1]
1. It is not valid if merely stipulated under state law. [§1.401(a)(9)-1, D-2,(a)(1)]
2. It is not valid to simply use a joint and last survivor annuity settlement without also naming a beneficiary. [§1.401(a)(9)-1, D-2,(a)(1)]
2. The IRC only allows the Designated Beneficiary to be an individual or group of individuals. [§.401(a)(9)(E)]
1. For purposes of required distributions during the participant’s lifetime on or after the RBD, that individual (or those individuals) must be identifiable as of the required beginning date. [§1.401(a)(9)-1, D-2(a)(1)]
2. If a participant dies before the RBD, the individual (or those individuals) must be identifiable as of the date of death. [§1.401(a)(9)-1, D-2(a)(1)]
3. That individual (or those individuals) must be identifiable at all subsequent times. [§1.401(a)(9)-1, D-2(a)(1)]
3. Under certain circumstances specified in the Proposed Regulations, DB status can be achieved if a trust is named as beneficiary.
1. A Designated Beneficiary can exist when a trust is the qualified plan’s beneficiary provided four prerequisites are met. [§1.401(a)(9)-1, D-5]
1. The trust is valid under state law, or would be but for the fact that there is no corpus.
2. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the participant.
3. The trust’s own beneficiaries who will be receiving proceeds from the qualified plan are named individuals or readily identifiable from the trust instrument, e.g., a class of beneficiaries such as spouse, children, etc. is acceptable.
4. Certain documentation is provided to the plan administrator so that the beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the participant’s benefit are identifiable to the plan administrator.
2. For purposes of required distributions during the participant’s lifetime, all four of the prerequisites must be met as of the later of the date on which the trust is named as a beneficiary of the participant or the participant’s RBD and all subsequent periods during which the trust is named as a beneficiary. [§1.401-(a)(9)-1, D-5(b)] The fourth requirement can be satisfied under either of the following conditions. [§1.401-(a)(9)-1, D-7(a)]
1. The participant provides a copy of the trust instrument to the plan administrator and agrees that if the trust instrument is amended at any time in the future, he/she will, within a reasonable time, provide to the plan administrator a copy of each such amendment.
2. The participant provides the plan administrator with a list of all the beneficiaries of the trust (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. He or she must certify that, to the best of his/her knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied. In addition, the plan participant must agree to provide corrected certifications if an amendment changes any information previously certified. Finally, the participant agrees to provide a copy of the trust instrument to the plan administrator upon demand.
3. For purposes of required distributions following a participant’s death before his or her RBD, prerequisites (1), (2) and (3) in item 3 a) above must be satisfied as of the date of death. Requirement (4) must be satisfied prior to the end of the ninth month following the month of the participant’s death. [§1.401(a)(9)-1, D-6(a)] The documentation requirement can be fulfilled under either of the following conditions. [§1.401(a)(9)-1, D-7(b)]
1. The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.
2. The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of the date of death (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. The trustee must certify that, to the best of the trustee’s knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied as of the date of death. In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.
4. For purposes of required distributions following a participant’s death after his or her RBD, all four prerequisites must have been fulfilled as outlined in item 3 b) above pertaining to distributions during the participant’s lifetime. In addition, either of the following steps must be carried out prior to the end of the ninth month following the month of the participant’s death. [§1.401(a)(9)-1, D-7(b)]
1. The trustee provides the plan administrator with a copy of the actual trust document for the trust that is named as a beneficiary of the participant under the qualified plan as of the date of death.
2. The trustee provides the plan administrator with a final list of all the beneficiaries of the trust as of the date of death (including contingent and remainder beneficiaries) along with a description of the conditions for their entitlement. The trustee must certify that, to the best of the trustee’s knowledge, the list is correct and complete and that the requirements of 3 a) (1), (2) and (3) above are satisfied as of the date of death. In addition, the trustee agrees to provide a copy of the trust instrument to the plan administrator upon demand.
4. Calculation-DB: If a group of individuals are DB’s, the person with the shortest life expectancy will be the Designated Beneficiary for purposes of selecting the life expectancy factor to use in MRD calculations. [§1.401(a)(9)-1, E-5(a)(1)] This person is sometimes referred to as the "calculation-DB" although that term does not appear in the Code or Regulations.
1. In the event one or more of the plan’s beneficiaries does not qualify as a Designated Beneficiary, the participant will be treated as not having any DB’s even if the balance of the beneficiaries are individuals that fulfill the DB requirements. NOTE: This rule applies regardless of when death occurs. [§1.401(a)(9)-1, D-2A(b) and E-5(a)(1)]
2. The existence of a contingent beneficiary will have no bearing on determining the individual DB with the shortest life expectancy OR whether there is a beneficiary that does not qualify as a DB. [§1.401(a)(9)-1,E-5(e)(1)]
5. Minimum Distribution Incidental Benefit (MDIB) Rule: To eliminate one possible abuse when calculating MRD’s, there is a special rule for cases involving a non-spouse DB that is more than ten years younger than the participant. [Note: IRC §408A(c)(5)(B) exempts Roth IRA’s from the MDIB provisions.]
1. When the age spread between the participant and the calculation-DB exceeds ten years, the "applicable divisor" listed in §1.401(a)(9)-2, Q-4 or Q-5 must be substituted for the life expectancy factor when calculating MRD’s. Those applicable divisors can also be found in Appendix E of IRS Publication 590.
2. Except in cases of multiple beneficiaries, the actual age of a spousal beneficiary is always used even if he/she is fifteen or twenty years younger than the participant. [§1.401(a)(9)-2, Q-7(a)] Please note, however, that the MDIB rules do apply whenever a spouse that is more than ten years younger than the participant is not the sole primary beneficiary. [§1.401(a)(9)-2, Q-7(b)]
3. Special Note: The MDIB rule only applies to years when the plan participant is alive for at least a portion of the year. Starting in the year following a participant’s death, the MDIB rule is ignored. [§1.401(a)(9)-2, Q-3]
6. Changing DB’s: While the participant is alive, it is permissible to add a new Designated Beneficiary or replace an existing one after the RBD. [§1.401(a)(9)-1, E-5(c)]
1. Note, however, that a new beneficiary added to an existing group of DB’s may alter the minimum required distribution calculations in future years. There is no impact on the calculations for the year in which the addition occurs. [§1.401(a)(9)-1, E-5(c)(1)]
1. If the newly added Designated Beneficiary was born before the other members of the group, a larger minimum distribution will be required because the shorter LEF of the new person must be used in the computation.
2. In the event the new beneficiary is not the oldest member of the group, the MRD calculations will continue to be based on the same variables that would have been used had he/she not become a beneficiary.
2. A similar possibility occurs if a new individual replaces someone in a group of DB’s. [§1.401(a)(9)-1, E-5(c)(1)]
1. If that new beneficiary is older than the person he/she replaces and the new beneficiary is also the oldest person in the newly formed group, his/her LEF must be used when calculating minimum distributions in future tax years. The net result will be a larger MRD.
2. In the event the new beneficiary is younger than the person he/she replaces, there is no need to alter the MRD calculations in future years.
3. The MRD calculations will likewise remain the same if the new beneficiary happens to be older than the person he/she replaces but NOT the oldest member of the newly formed group.
3. If a new beneficiary is named after the required beginning date due to the death of the original DB whose LEF was being used in the MRD calculations, the remaining life expectancy of the original calculation-DB will continue to be used in those calculations. [§1.401(a)(9)-1, E-5(e)(2)]
1. This is true even if the new beneficiary’s life expectancy is shorter than the LEF of the deceased DB.
2. There is an exception to this "post-death" rule if the spouse were the original DB and his/her life expectancy were being redetermined each year.
1. In that event, the remaining life expectancy of the deceased spouse reduces to zero in the year following his/her death.
2. However, that glitch is avoided if the life expectancy of the deceased spouse was NOT being redetermined. In the latter case his/her death will be treated as if it were the death of a non-spouse DB.
7. Account Value: The minimum required distribution calculations for a particular year are always based on each account’s balance as of the last valuation date in the preceding calendar year. [§1.401(a)(9)-1, F-5,(a)]

8. Non-DB Status: Naming a charity, partnership, corporation or an estate as a partial or total beneficiary of a separate account within a qualified plan means that at least a portion of the assets will pass to a non-human entity. Without an identifiable human being to receive the proceeds after the participant’s death, it is impossible to establish a life expectancy.
1. Without a beneficiary with a measurable life expectancy, the plan lacks a Designated Beneficiary! [§1.401(a)(9)-1, D-2A & D-5] Hence, the participant is forced to use a single life expectancy from Table V of Reg. §1.72-9 when computing MRD’s. [§1.401(a)(9)-1, D-2A(b)]
2. A qualified plan also lacks a DB if a charity, partnership, corporation or an estate is added as a "new" beneficiary following the participant’s required beginning date. [§1.401(a)(9)-1, E-5(c)(2)]
3. Except in the case of a DB’s death, similar results occur if a plan has no named beneficiary after the required beginning date. [§1.401(a)(9)-1, E-5(c)(2)]
9. Spousal Rollover IRA: Except for required distributions, benefits payable to a surviving spouse as beneficiary of a qualified plan may be transferred to an IRA in the name of that surviving widow(er). This is true regardless of when the participant dies. If handled properly, such a transfer does not create a taxable event. The survivor becomes the owner of the new IRA. Thereafter, he or she is eligible to use all the normal distribution options available to an IRA owner.

 

Can The Qualified Plan Limit Your Planning Options?

All the distribution planning in the world may be for naught if the plan document blocks the desired implementation. The tax rules and regulations previously cited are contingent, in many ways, on the provisions of the qualified plan. This means your tax and estate planning preferences may not be available through the current trustee. If that is the case, it may be prudent to change trustees while the participant is still alive. Remember that a Designated Beneficiary can execute a trustee-to-trustee transfer between IRA’s and TSA’s to obtain more flexible distribution options or better investment performance. However, that remedy is not available if the assets reside in a pension, profit sharing or stock bonus plan. Of course, a spouse can work around the problem by using a spousal rollover IRA, but even that solution may interfere with the estate plan.

1. When a participant DIES BEFORE THE REQUIRED BEGINNING DATE, the applicability of the five-year rule and its two exceptions depends as much on the plan’s language as it does on the wishes of the beneficiary. (See flow chart on Table 3 entitled "Plan Restrictions Control Postmortem Distribution Options Before The Required Beginning Date") Please note that a qualified plan is allowed to effectively eliminate all the postmortem options available under the tax rules by requiring a complete distribution at some point before the deadline imposed by the Five-Year Rule. This could be a major detriment to advantageous planning for the survivors unless a trustee-to-trustee transfer can be used to reposition the assets to a plan with more liberal provisions.
1. If the plan does not include a provision specifying the method of distribution after the death of a participant, the proposed regulations state that distributions MUST conform to the following rules.
1. In cases where the spouse is the DB, distributions are to be made in accordance with either the "General Exception" or the "Spousal Exception" to the Five-Year Rule. [§1.401(a)(9)-1, C-4(a)(1)]
2. All other cases must adhere to the Five-Year Rule. [§1.401(a)(9)-1, C-4(a)(2)]
2. Under the proposed regulations, a qualified plan may adopt provisions specifying how distributions will be carried out if the participant dies before his/her required beginning date. For example, a plan is allowed to establish one method for a surviving spouse and another for non-spouse beneficiaries. However, there must be a single method covering the distribution of all benefits in each separate account belonging to a participant. Note also that the plan rules may be more restrictive than the tax law. [§1.401(a)(9)-1, C-4(b)]
1. Every beneficiary could be forced to withdraw under the provisions of the Five-Year Rule or before an earlier date.
2. A Surviving spouse might be allowed to use the General Exception or Spousal Exception while all others would be restricted to the Five-Year Rule or an earlier withdrawal deadline.
3. Non-spouse beneficiaries might be permitted to use the General Exception but a spouse would be limited to the Five-Year Rule or an earlier withdrawal deadline.
4. All beneficiaries could be required to use either the General Exception or the Spousal Exception depending on their relationship with the deceased participant. NOTE: This does not present a problem because a beneficiary may always accelerate withdrawals if he/she wants to rapidly drain the account.
3. The plan may allow an election by the participant or their beneficiaries. If such an election is possible, the plan may specify which method of distribution applies if neither the participant nor the beneficiary makes that election. In the event neither party elects a method and the plan fails to stipulate which rule applies, the proposed regulations state that distributions must be made as if the plan contained no option provisions (see #1 above). [§1.401(a)(9)-1, C-4(c)]
1. The election must be made by the earlier of:
1. December 31 of the calendar year in which distribution would be required to commence to satisfy the two exceptions to the Five-Year Rule, or
2. December 31 of the calendar year that contains the fifth anniversary of the participant’s death.
2. As of such date, the election must be irrevocable with respect to the beneficiary and all subsequent beneficiaries.
3. The election must apply to all subsequent years.
2. When a participant DIES ON OR AFTER THE REQUIRED BEGINNING DATE, the "... at least as rapidly as ..." phrase in IRC §401(a)(9)(B)(i)(II) leaves plenty of latitude for qualified plans to foil distribution planning. For example, at one time a well-known discount brokerage firm headquartered in San Francisco required a 100% distribution to all beneficiaries by December 31 of the year following a participant’s death. Thankfully, that restrictive language has been replaced with provisions that mirror the tax code. [Remember, IRC §401(a)(9)(B)(i) does NOT apply to Roth IRA’s because no method is used to compute required distributions before the owner’s death.]
1. While such restrictions may appear to place a firm at a competitive disadvantage, the provisions are so deeply imbedded in their disclosure documents that innocent participants hardly ever stumble onto them. Even knowledgeable practitioners can overlook these minute snags.
2. Another favorite trick of many trustees for mutual fund and life insurance company qualified plans is to offer only certain types of life expectancy determinations in conjunction with the minimum distributions they will automatically send you from their plans. This effectively curtails their administrative workload (overhead expense) and serves to shift the burden of responsibility for more complex calculations back to the participant or his/her beneficiary.
3. There is a labyrinth of possible minimum required distribution alternatives following a death that occurs after the required beginning date. The flow charts on Tables 4A through 4F provide a map that will help you navigate though the maze. To effectively use those tables you must first know if there was a Designated Beneficiary. The next step is to ascertain if that DB was the spouse or a non-spouse. Finally, was a joint or single life expectancy being used to calculate MRD’s before death. With those facts in mind, use the quick references printed in the black tabs near the top of each table to guide you to the proper table. Once on the correct table, look for an oval that accurately fits your case and follow the arrows. SPECIAL NOTE: If your search takes you to a page without an appropriate oval, hunt for a second table with the same black tab quick reference. Remember too, that the absence of a Designated Beneficiary limits your search to Table 4F.
3. When calculating REQUIRED DISTRIBUTIONS DURING A PARTICIPANT’S LIFETIME, a qualified plan may mandate the redetermination of life expectancies. Unfortunately, that requirement will accelerate the recognition of taxable income when a participant outlives his/her spouse. The same negative impact confronts children who receive benefits from a deceased parent’s qualified plan. Proposed Regulation §1.401(a)(9)-1, E-7 sets the ground rules that a qualified plan must follow. Within those guidelines, almost anything is possible -- including the ability to require redetermination of life expectancies. (See flow chart on Table 5 entitled "Plan Provisions Dictate Ability To Redetermine Life Expectancy") [Note: IRC §408A(c)(5)(A) exempts Roth IRA’s from required distributions during the owner’s lifetime.]
1. A qualified plan may adopt rules specifying whether life expectancies will be redetermined under IRC §401(a)(9)(D). [§1.401(a)(9)-1, E-7(b)]
1. The plan can specify that the L.E. of both the participant and spouse DB must be redetermined.
2. Conversely, the plan could stipulate that neither the participant’s nor the spouse’s L.E. may be redetermined.
3. The plan may require the L.E. of the participant to be redetermined even though it does not permit the L.E. of the spouse DB to be redetermined.
4. The plan could also dictate the reverse of "c" above. That is, the L.E. of the spouse DB must be redetermined but the participant’s L.E. may not be redetermined.
2. A qualified plan may allow the participant to elect whether life expectancies will be redetermined under IRC §401(a)(9)(D). [§1.401(a)(9)-1, E-7(c)]
1. Such an election must be made no later than the Required Beginning Date.
2. That election must be irrevocable as of the RBD and must apply to all subsequent years.
3. In the event an election is possible but none has been filed by the RBD, the plan may stipulate whether life expectancy will be redetermined under IRC §401(a)(9)(D). [§1.401(a)(9)-1, E-7(c)]
1. Absent a timely election, the plan can mandate the same options "a" through "d" that would apply if no election were offered.
2. If an available election is not exercised in a timely manner and the plan fails to spell out a required substitute, the single L.E. of the participant (or the joint L.E. of the participant and spouse DB) must be redetermined annually.
4. In cases where a plan is silent about IRC §401(a)(9)(D), the proposed regulations stipulate that the single life expectancy of the participant (or the joint L.E. of the participant and spouse DB) must be redetermined annually. [§1.401(a)(9)-1, E-7(a)]

Conclusions  

The text on the preceding pages provides a reasonable primer to use when beginning to explore the financial and estate planning implications of the required distribution rules under IRC §401(a)(9). Serious students need to go far beyond the limited areas addressed here. The proposed regulations provide a detailed map of the terrain that must be traversed.

Other Resources

An excellent interpretation of the minute details on that "map" is available in Life and Death Planning For Retirement Benefits, 3^rd Edition by Natalie B. Choate, Esq. Ms. Choate has a tremendous depth of knowledge in this subject. Her telephone number in Boston is (617) 951-8817. Her web site is www.ataxplan.com. Another grand master of this subject is Noel C. Ice, Esq. in Fort Worth, Texas. His office telephone number is (817) 877-2885. Mr. Ice has graciously posted the complete text of his 700± page tome entitled Distribution and Estate Planning For Deferred Compensation and IRA Benefits on his web site at www.trustsandestates.net. Both Ms. Choate and Mr. Ice provide forms and sample language to assist members of the legal profession. Links to their web sites are also listed on the page entitled "Other Resources".

If you have read to this point in the text, be sure to peruse the Planning Pointers on another page of this web site.   They apply the Rules of the Road spelled out above to everyday circumstances confronting both individual participants and planning professionals.