RMD and death in year one turns 70.5 Options

[BruceC]

I'm having trouble finding this answer, so thought someone here might know.

An individual turns 70.5 in 2008 and dies prior to the RBD of 4/1/09. Is the RMD for 2008 required to be taken out by named IRA beneficiaries? I know this is the case on or after RMD date, but I think I've read that death prior to RMD does not require that the first RMD actually be taken, even though the decedent may have taken part or all of the RMD by the date of death.

Thanks

BruceM

[ERISAnut]

NO, he does not. While the first distributions from the plan must satisfy the RMD, in this case there is not RMD due to the beneficiary. Since the taxpayer actually died prior to the RBD, the death distribution rules effectively preempts the need to take the first Age 70.5 RMD as this was not due to begin until April 1, 2009.

Now, this would be different had the RBD been reached, and another RMD would be due on January 1 of the current year, but by December 31st of that year.

Therefore, the first death distribution to the beneficiary is not due until December 31, 2009 (the end of the year following the year of death) since the taxpayer died in the year he turned 70.5. I am assuming the beneficiary is the spouse, but with this particular fact pattern, it does not matter.

Hope this helps.

[J Simmons]

ERISAnut, what's the citation for no RMD for year of death after reaching age 70.5 but before RBD?

[Appleby]

How about Treasury Regulation § 1.401(a)(9)-3 ?

[J Simmons]

Thanks, Appleby. That seeming bright line is clouded a little however by the definition of distribution calendar year in the context of a DC plan, as set forth in Treas Reg § 1.401(a)(9)-5, Q&A-1(b) defined to include the calendar year that one reaches age 70¹/₂.

(b) Distribution calendar year. A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70¹/₂, the employee's first distribution calendar year is the year the employee attains age 70¹/₂. * * *

[Guest_named_mjb_*]

Thanks, Appleby. That seeming bright line is clouded a little however by the definition of distribution calendar year in the context of a DC plan, as set forth in Treas Reg § 1.401(a)(9)-5, Q&A-1(b) defined to include the calendar year that one reaches age 70¹/₂.

(b) Distribution calendar year. A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70¹/₂, the employee's first distribution calendar year is the year the employee attains age 70¹/₂. * * *

From Pub 590, Chapter 1 Traditonal IRAs, When Must You Withdraw Assets: "If an IRA owner dies after reaching 70 1/2 but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date."

[J Simmons]

Thanks, mjb. Realizing that the OP is about an IRA, do you know if the IRS has a similar pronouncement re RMD if the benefits are in a DC plan at the time of death?

This post has been edited by J Simmons: Oct 23 2008, 10:15 AM

[jevd]

Thanks, Appleby. That seeming bright line is clouded a little however by the definition of distribution calendar year in the context of a DC plan, as set forth in Treas Reg § 1.401(a)(9)-5, Q&A-1(b) defined to include the calendar year that one reaches age 70¹/₂.

(b) Distribution calendar year. A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70¹/₂, the employee's first distribution calendar year is the year the employee attains age 70¹/₂. * * *

Here is that complete section:

(b) Distribution calendar year.
A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 70½ , the employee's first distribution calendar year is the year the employee attains age 70½. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee retires, the employee's first distribution calendar year is the calendar year in which the employee retires. In the case of distributions to be made in accordance with the life expectancy rule in §1.401(a)(9)-3 and in section 401(a)(9)(B)(iii) and (iv), the first distribution calendar year is the calendar year containing the date described in A-3(a) or A-3(b) of §1.401(a)(9)-3, whichever is applicable.

Emphasis added.
This section shifts the Required distribution to the Beneficiary to the year following death.

This post has been edited by jevd: Oct 23 2008, 10:19 AM

[J Simmons]

That emphasized portion is for MRDs based on the beneficiary's life expectancy (as an exception to the 5 year rule), not MRDs based on the employee reaching age 70 1/2. What relieves the year in which the employee reaches 70 1/2 from being a distribution calendar year because he then dies before April 1 of the next calendar year, as clearly delineated in the first two sentences of Treas Reg § 1.401(a)(9)-5, Q&A-1(b)?

[BruceC]

Thanks very much for the replies...particularly the direct quote from 590, which I somehow managed to miss

BruceM

[Guest_named_mjb_*]

Thanks, mjb. Realizing that the OP is about an IRA, do you know if the IRS has a similar pronouncement re RMD if the benefits are in a DC plan at the time of death?

See reg 1.401(a)(9)-2 Q/A-2(a) and -3 Q/A-1(a).

[J Simmons]

Thanks, jevd and again mjb.

For DC plans, Treas Reg § 1.401(a)(9)-5, Q&A-1(b) provides that the calendar year an employee reaches age 70 1/2 is a 'distribution calendar year' for which an RMD must be made even though RBD is not until April 1 of the next calendar year (and which RMD would be on the employee's life expectancy, for example 1/16th).

Treas Reg § 1.401(a)(9)-2, Q&A-2(a) provides that one's RBD (unless not a 5% owner and yet working) is April 1 following the end of the calendar year in which he or she reaches age 70 1/2.

Treas Reg § 1.401(a)(9)-3, Q&A-1(a) provides that if the employee dies before his/her RBD, then all the benefits must be paid out under the 5 year rule (unless over the beneficiary's life expectancy beginning the year following death, except that if the beneficiary is a surviving spouse of the employee, then over the surviving spouse's life expectancy when she/he reaches age 70 1/2).

I don't see these provisions as incompatible, but as capable of a congruous interpretation. Employee dies after reaching age 70 1/2 but before April 1 of the following calendar year. Treas Reg § 1.401(a)(9)-5, Q&A-1(b) calls for 1/16th RMD for the year of death since he had reached age 70 1/2, that can be paid as late as April 1 of the following calendar year. Treas Reg § 1.401(a)(9)-3, Q&A-1(a) calls for all the benefits to be paid out under the 5 year rule or its exceptions. The other 15/16th's on my example could all be paid out under the 5 year rule or its exceptions.
 

[jevd]

Thanks, mjb. Realizing that the OP is about an IRA, do you know if the IRS has a similar pronouncement re RMD if the benefits are in a DC plan at the time of death?

See reg 1.401(a)(9)-2 Q/A-2(a) and -3 Q/A-1(a).

Also: The 1.401(a)(9) regs are written for Qualified Plans. The following is from 1.408-8

Applying the 1.401(a)(9) Regs to IRAs unless otherwise stated.

The following questions and answers relate to the distribution rules for IRAs provided in sections 408(a)(6) and 408(b)(3).

10.1 Q-1. Is an IRA subject to the distribution rules provided in section 401(a)(9) for qualified plans?
A-1. (a) Yes, an IRA is subject to the required minimum distribution rules provided in section 401(a)(9). In order to satisfy section 401(a)(9) for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003, the rules of §§1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6T for defined contribution plans must be applied, except as otherwise provided in this section. For example, whether the 5-year rule or the life expectancy rule applies to distributions after death occurring before the IRA owner's required beginning date is determined in accordance with §1.401(a)(9)-3 and the rules of §1.401(a)(9)-4 apply for purposes of determining an IRA owner's designated beneficiary. Similarly, the amount of the minimum distribution required for each calendar year from an individual account is determined in accordance with §1.401(a)(9)-5. For purposes of this section, the term IRA means an individual retirement account or annuity described in section 408(a) or (b). The IRA owner is the individual for whom an IRA is originally established by contributions for the benefit of that individual and that individual's beneficiaries.[191]

(b) For purposes of applying the required minimum distribution rules in §§1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6T for qualified plans, the IRA trustee, custodian, or issuer is treated as the plan administrator, and the IRA owner is substituted for the employee.[192]

(c) See A-14 and A-15 of §1.408A-6 for rules under section 401(a)(9) that apply to a Roth IRA.

[GMK]

And the answer is..? I may (and hope I don't) need to know this.

Are the 3 sentences that define 'first distribution calendar year' in post #8 mutually exclusive, i.e., if one is true, then the other two do not apply. Or can more than one apply?

[Sieve]

John --

Treas. Reg. Section 1.401(a)(9)-3, Q&-1(a) does, I believe, stand for the proposition that someone dying before the required beginning date does not need to take the RMD. This is explained in Notice 2007-7, which discusses miscellaneous PPA '06 provisions (this Q&A being one of many explaining the non-spouse rollover rule):

"A–17. (a) General rule. If the employee dies before his or her required beginning date, the required minimum distributions for purposes of determining the amount eligible for rollover with respect to a nonspouse beneficiary are determined under either the 5-year rule described in § 401(a)(9)(B)(ii) or the life expectancy rule described in § 401(a)(9)(B)(iii). See Q&A–4 of § 1.401(a)(9)–3 to determine which rule applies to a particular designated beneficiary. Under either rule, no amount is a required minimum distribution for the year in which the employee dies. The rule in Q&A–7(b) of § 1.402(c)–2 (relating to distributions before an employee has attained age 70½) does not apply to nonspouse beneficiaries." (Emphasis added.)

(The highlighted portion above is not creating a new rule, but merely describing that particular rule as discussed in the 1.401(a)(9) regs.)

So, even though you have a first distribution year, you have no required distribution in that case. If distributions had begun, i.e. the required beginning date for the first distribution year had been reached and the first distribution had been made, then you would have a required distribution in the year of death if the individual dies before that year's required beginning date.

Also note that Treas. Reg. Section 1.401(a)(9)-3, Q&A-1(a) says that distribution following the pre-RBD death an MRD-eligible employee can be made under either the 5-year rule or the life expectancy rule, and that the 5-year rule "requires that the entire interest of the employee be distributed within 5 years of the employee's death . . ." It does not indicate that the "entire interest of the employee" is first reduced by the MRD for the first distribution year.

GMK - The first distribution calendar year is determined based on whether the individal is or is not a 5% owner. If the individual is a 5% owner, the 1st distribution calendar year is the year the individual turns 70-12, and the RBD is April 1 of the next calendar year. If the individual is not a 5% owner, the 1st distribution calendar year is the year in which the individual terminates employment or turns 70-1/2, whichever is later--so, the RBD is April 1 of the calendar year folllowing termination of employment if that individual terminates employment after reaching age 70-1/2 (say, at age 78). So, these required begining dates are mutually exclusive.

This post has been edited by Sieve: Oct 23 2008, 09:10 PM