Life and Death Planning for Retirement Benefits

Chapter 10: RMD Rules for “Annuitized” Plans

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When the annuity payments must commence; the RBD

The first payment under the annuity must be made not later than the employee’s Required Beginning Date (RBD). Reg. § 1.401(a)(9)-6 , A-1(c)(1). Note: See ¶ 10.3.01 and Reg. § 1.401(a)(9)-5 , A-1(e), third sentence, if part or all of a defined contribution account is being converted to an annuity after the RBD. This book does not cover the rules applicable in a DB plan if additional annuitized benefits are earned after the RBD. The “required beginning date” (RBD) is the deadline by which a retirement plan participant must begin taking required minimum distributions. § 401(a)(9)(A) ; see ¶ 1.4 . For traditional IRAs, the RBD is April 1 of the year following the year in which the participant reaches age 70½. For 401(k) plans, 403(b) plans, and other qualified or nonIRA plans, the RBD is generally April 1 of the year following the year the participant (1) reaches age 70½ or (2) retires, whichever is later, provided the participant owns less than five percent of the employer that sponsors the plan. The post-death minimum distribution rules are different depending on whether the participant died before or after his RBD. Note the following:  Because minimum distributions are not required from a Roth IRA prior to the participant’s death, this requirement simply does not apply to annuities purchased inside a Roth IRA. A Roth IRA does not have an “RBD.” § 408A(c)(5) ; see ¶ 5.2.02 .  The requirement that annuity payouts must begin by the RBD means that it is “illegal” to purchase a “longevity annuity” (one that does not start paying out until the owner reaches his 80s) inside a traditional IRA. However, the IRS has created an exception to this rule for “QLACs”; see ¶ 10.3.02 . The amount that must be paid on or before that date is whatever the regular annuity amount is. For example, if the employee is to receive $6,000 per month, he must receive the first $6,000 on or before his RBD, the next $6,000 a month later, and so on until the expiration of the agreed- upon duration of the annuity. Here we have another difference from DC plans. Under a DC plan, if the employee took no distribution from the plan in his first Distribution Year, he would have to take two years’ worth of distributions in the second Distribution Year. See ¶ 1.4.07 (A). This concept does not apply to annuity payouts. As long as the periodic payments start no later than the RBD, there is no need to take some kind of “catch-up distribution” for the first Distribution Year. Under a DB plan, there simply is no RMD for the first Distribution Year—with one major exception: If the participant takes all or part of his benefits in the form of a lump sum distribution rather than as an annuity, in or after his first Distribution Year, then there is an RMD for the first Distribution Year; see ¶ 10.2.08 . Expert Comment: Late Retiree’s Dilemma The regulations force the DB plan participant to annuitize his benefits starting no later than the RBD. A top actuary, the late Ed Burrows (see ¶ 10.4.03 ), pointed out that this creates a problem for a business owner who is still working and participating in his DB plan when he reaches age 70½. As a “ 5-percent owner,” he must start taking RMDs by April 1 following the year he reaches age 70½. § 401(a)(9)(C) ; Reg. § 1.401(a)(9)-2 , A-2(a). However, typically the entrepreneur does not want to be forced into making annuitization choices prior to retirement, while he is still accruing benefits under the plan. At one time, the IRS allowed RMDs for a DB plan to be computed