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RMD and death in year one turns 70.5


Guest BruceC

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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

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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.

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

John Simmons

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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. * * *

John Simmons

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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."

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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?

John Simmons

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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.

JEVD

Making the complex understandable.

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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)?

John Simmons

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

BruceM

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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).

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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.

 

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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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]

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

JEVD

Making the complex understandable.

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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?

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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©–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.

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With all due respect, the problem inheres from the facts that the RMD from DC plan benefits is triggered for years in which the employee is 70 1/2 years or older (Treas Reg § 1.401(a)(9)-5, Q&A-1(b)) and the RBD is delayed to April 1 of the calendar year after the one in which the employee reaches age 70 1/2 (Treas Reg § 1.401(a)(9)-2, Q&A-2(a)).

So it is possible as the OP posits (albeit in the IRA rather than DC context) that an employee may live to trigger a first RMD and yet die before his RBD, the date that first RMD must be paid or face the 50% penalty. Regarding an employee that dies at any time before his RBD, Treas Reg § 1.401(a)(9)-3, Q&A-1(a) provides that all benefits must be paid within the 5 year rule (or life expectancy exceptions). This is so whether the employee dies at age 45, 62, or March 31 of the calendar year after that in which he reached age 70 1/2. Notice 2007-7, A-17, quoted by Sieve, is addressing the RMD's triggered by the employee's death, whether per the 5 year rule or the life expectancy exceptions. Neither of those as triggered by the employee's death requires an RMD for the year of the employee's death.

However, what -5, Q&A-1(b) provides is a different RMD trigger. Not the employee's death, but instead his having reached age 70 1/2 before dying. Treas Reg § 1.401(a)(9)-5, Q&A-1(b) specifies that the year that the employee reaches age 70 1/2 is a distribution calendar year, for which an RMD is required. This provision specifically deals with the calendar year the employee reaches age 70 1/2. Also note, -5, Q&A-1(b) does not indicate that the employee must live to at least April 1 of the next calendar year for the year of reaching age 70 1/2 to be a 'distribution calendar year'.

Canons of interpretation would suggest that the more specific (-5, Q&A-1(b)) is favored over apparently conflicting broader provisions (-3, Q&A-1(a)). That would favor there being an MRD being triggered by reason of the employee reaching age 70 1/2 before dying, per -5, Q&A-1(b). However, here, both may be accommodated in a single interpretation, see post #12 above, which is another interpretive preference. The two provisions are not logically inconsistent. The triggering of an RMD under -5, Q&A-1(b) because the employee reached age 70 1/2 before dying does not prevent his death beneficiary from also complying with the 5 year rule or life expectancy exceptions to that rule under -3, Q&A-1(a).

I understand the posts pertaining to IRA situations. There is the IRS statement from Publication 590 mentioned above in post #6. And the IRA regs provide that RMDs from IRAs are generally to mimic or piggyback off of the Treas Regs § 1.401(a)(9). I'm not sure that the clarity of a regulation about RMDs in the DC context (-5, Q&A-1(b)), i.e. that an RMD is triggered for the year the employee reaches age 70 1/2, may be ignored on the strength of a publication statement about RMDs from IRAs. The stakes being a penalty tax equal to 50% of a missed RMD amount, I'd want more basis for the DC context than the statement in a publication statement about RMDs from IRAs to ignore a regulation entitled, Required minimum distributions from defined contribution plans.

Maybe just my conservative nature, but before I'd hazard that 50% penalty tax I would want something a bit more authoritative.

John Simmons

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Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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The distribution rules for qualified plan participants who die prior to the required beginning date (April 1 of the year after attaining 70 1/2) are the same as the rules for IRAs in Pub 590: distribution must commence by the end of the 5th year after death or by commencing a periodic payment over the life or life expectancy of the beneficiary beginning by Dec 31 of year after death. See Pub 575 P 31 rt col bottom (required beginning date) and P32 rt col. top (distribution requirements). Pub 575 does not require that an RMD must be taken by a participant in a qualified plan who attains age 70 1/2 but dies before the following April 1.

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Nor does Pub 575 specify that the RMD for the reader's "starting year" (the calendar year in which age 70 1/2 is reached) doesn't have to be made if you die after reaching age 70 1/2 and before April 1 of the next calendar year.

John Simmons

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John --

I don't disagree with your analysis. It certainly is acceptable, logical and consistent with the rules.

But I don't see anything in language of the regs (that has been cited here) that leads me to believe, in the instance of someone who dies before the RBD, that there is different treatment if the "triggering event" is the death of the individual before attaining age 70-1/2 rather than if the triggering event is the attainment of age 70-1/2 which then is followed by death before RBD. The cites discuss "death before RBD", both in the regs (1.401(a)(9)-3, Q&A-1(a)) and Notice 2007-7 (Q&A-17), not differentiating that event, as you point out, based on attainment of any age. In each case, death occurs before the RBD.

You indicate yourself that death before RBD includes death on March 31 of the year following the year of the 70-1/2 birthday. If so, the rule relating to death before RBD simply qualifies the normal distribution rule (i.e., distribution by the RBD after attaining age 70-1/2).

Also, let's look at the statute. IRC Section 401(a)(9)(B)(ii) covers all instances other than death after the commencement of distributions (IRC Section 401(a)(9)(B)(i)), and it says " . . . [a qualified plan must provide that] if an employee dies before the distribution of the employee's interest has begun [before the RBD], the entire interest of the employee will be distributed within 5 years after the death . . ." (Emphasis added.)

And, I don't think the normal RBD distribution after age 70-1/2 is the specific rule here. Rather, I think that the death rule is more specific, because you can die after reaching the age 70-1/2 RBD, but you can't reach the age 70-1/2 RBD after death. So, the instance in which both events occur (age 70-1/2 & death) is more specific than the one where only one occurs (attainment of age 70-1/2)--i.e., if 70-1/2 and living, rule A applies, but, if age 70-1/2 and then dead, rule B applies.

Also, just because 2 provisions can be interpreted consistently without one trumping the other, it doesn't mean that that always is the proper interpretation.

If there was doubt in my mind--although I haven't yet checked Natalie Choate's book--I, too, am conservative enough not to risk the 50% penalty for failure to distribute properly. I would not have a problem here, however.

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Had Treas Reg § 1.401(a)(9)-5, Q&A-1(b) not been included as part of the regulatory set, I would wholeheartedly agree. I just don't think it's proper to apply Treas Reg § 1.401(a)(9)-3, Q&A-1(a) in isolation, and there is nothing of which I'm aware in the 401a9 regs that suggests that Treas Reg § 1.401(a)(9)-5, Q&A-1(b) is subordinate to and must yield to Treas Reg § 1.401(a)(9)-3, Q&A-1(a).

John Simmons

johnsimmonslaw@gmail.com

Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

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How about Reg. 1.401(a)(9)-2, Q&A-6(a)? It gives an example of someone who starts distributions before age 70-1/2. then dies before the RBD (April 1 of the year following the year reaching age 70-1/2). In that case, the reg clearly says that MRDs must be made under IRC Section 401(a)(9)(B)(ii), (iii) or (iv), and NOT under IRC Section 401(a)(9)(B)(i). That means that death prior to RBD (no matter the age) will trigger a distribution based on death, not one based on reaching age 70-1/2.

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Sieve - Thank you for your response in post #15, regarding the first 2 definitions of 'first distribution calendar year' in post #8 (for age 70-1/2 and retirement). Unfortunately, I did not state my question clearly.

To be more clear, my question is: In cases where the emphasized sentence in post #8 applies, are we to disregard the other 2 definitions (for age 70-1/2 and retirement) or can they also apply?

Until this thread, I thought RMD was due FOR the year of death if the employee attained age 70-1/2 and died before the RBD (separate from any RMD for the beneficiaries). jevd makes a strong argument that in this case the RMD shifts from the employee to the beneficiary, which shifts the first distribution calendar year. Hmmm. Fortunately, the situation has not come up yet, but it could.

Anyone - The statement in Pub 590 (in post #6), no minimum distribution if IRA owner reaches 70-1/2 and dies before the RBD, is very informative for IRA's. Do the IRA regs specifically say this, or is it an interpretation of the regs (and maybe the answer to this thread)?

Thanks to all who are contributing to this discussion.

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I think 1.401(a)(9)-5 Q&A 4 supports John's position. It says the rules for required minimum distributions during the participant's lifetime apply for distribution calendar years up to and including the year of death.

Q-4. For required minimum distributions during an employee's lifetime, what is the applicable distribution period?

A-4. (a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee's date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee's age as of the employee's birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee's death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.

(b) Spouse is sole beneficiary --(1) General rule. Except as otherwise provided in paragraph (b)(2) of this A-4, if the sole designated beneficiary of an employee is the employee's surviving spouse, for required minimum distributions during the employee's lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with paragraph (a) of this A-4 or the joint life expectancy of the employee and spouse using the employee's and spouse's attained ages as of the employee's and the spouse's birthdays in the distribution calendar year. The spouse is sole designated beneficiary for purposes of determining the applicable distribution period for a distribution calendar year during the employee's lifetime only if the spouse is the sole beneficiary of the employee's entire interest at all times during the distribution calendar year.

(2) Change in marital status. If the employee and the employee's spouse are married on January 1 of a distribution calendar year, but do not remain married throughout that year (i.e., the employee or the employee's spouse die or they become divorced during that year), the employee will not fail to have a spouse as the employee's sole beneficiary for that year merely because they are not married throughout that year. If an employee's spouse predeceases the employee, the spouse will not fail to be the employee's sole beneficiary for the distribution calendar year that includes the date of the spouse's death solely because, for the period remaining in that year after the spouse's death, someone other than the spouse is named as beneficiary. However, the change in beneficiary due to the death or divorce of the spouse will be effective for purposes of determining the applicable distribution period under section 401(a)(9) in the distribution calendar year following the distribution calendar year that includes the date of the spouse's death or divorce.

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I think 1.401(a)(9)-5 Q&A 4 supports John's position. It says the rules for required minimum distributions during the participant's lifetime apply for distribution calendar years up to and including the year of death.
Q-4. For required minimum distributions during an employee's lifetime, what is the applicable distribution period?

A-4. (a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee's date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee's age as of the employee's birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee's death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee's death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.

(b) Spouse is sole beneficiary --(1) General rule. Except as otherwise provided in paragraph (b)(2) of this A-4, if the sole designated beneficiary of an employee is the employee's surviving spouse, for required minimum distributions during the employee's lifetime, the applicable distribution period is the longer of the distribution period determined in accordance with paragraph (a) of this A-4 or the joint life expectancy of the employee and spouse using the employee's and spouse's attained ages as of the employee's and the spouse's birthdays in the distribution calendar year. The spouse is sole designated beneficiary for purposes of determining the applicable distribution period for a distribution calendar year during the employee's lifetime only if the spouse is the sole beneficiary of the employee's entire interest at all times during the distribution calendar year.

(2) Change in marital status. If the employee and the employee's spouse are married on January 1 of a distribution calendar year, but do not remain married throughout that year (i.e., the employee or the employee's spouse die or they become divorced during that year), the employee will not fail to have a spouse as the employee's sole beneficiary for that year merely because they are not married throughout that year. If an employee's spouse predeceases the employee, the spouse will not fail to be the employee's sole beneficiary for the distribution calendar year that includes the date of the spouse's death solely because, for the period remaining in that year after the spouse's death, someone other than the spouse is named as beneficiary. However, the change in beneficiary due to the death or divorce of the spouse will be effective for purposes of determining the applicable distribution period under section 401(a)(9) in the distribution calendar year following the distribution calendar year that includes the date of the spouse's death or divorce.

My only reply is that this is the "General Rule" and the regulations go on to explain requirements for distribution when death occurs before RBD. Thus the general rule would apply to all other situations except Death before RBD. ALso my response was addressing the OP and IRAs although it is my opinion that the same applies to qualified plans.

That being said, unless there is a compelling reason not to take the distribution for the year of death before RBD, then I would err on the conservative side and have the beneficiary take it and avoid any question of underdistributions. Opinion only. Consult with your paid professional or if it makes sense request a PLR.

JEVD

Making the complex understandable.

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For me, the compelling reason to answer this question one way or the other is to ensure that the plans operate in the best interests of the participants and their beneficiaries.

As I understand it:

If the plan requires the beneficiary to receive an RMD (for the year the 70-1/2 year old died pre-RBD) and if that RMD is in fact not required, then the plan has forced the beneficiary to pay taxes (on the RMD) unnecessarily, which reduces the net benefit to the beneficiary.

If an RMD is required for the year the 70-1/2 year old died pre-RBD and the plan tells the beneficiary that that RMD is not required, then the plan puts the beneficiary at risk for a hefty excise tax penalty.

Thanks, as always, for your comments.

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