In-Service Distribution and RMD

[Dougsbpc]

Suppose you have a 1 participant DB where the owner/participant reached the NRA a few years ago (5 yrs of partic). He began taking RMD's in 2007.

If the plan allows for in-service distributions at NRA could he take an in-service distribution even though he is taking RMDs?

If this is possible, can his RMD go down based on the in-service withdrawal? We think not.

[Blinky the 3-eyed Fish]

If the plan allows for in-service distributions at NRA could he take an in-service distribution even though he is taking RMDs?

WDTPS? I can't imagine the plan would not allow this.

If this is possible, can his RMD go down based on the in-service withdrawal? We think not.

The whole purpose of the RMD's is for the government to get some cake. Whether the in-service withdrawals are taken as cash (bread for the gov!) or rolled over to an IRA (mula for the gov since he has to take RMD's from the IRA), the gov gets its dough. So, why don't you think the RMD from the DB is reduced by in-service withdrawals?

[SoCalActuary]

Suppose you have a 1 participant DB where the owner/participant reached the NRA a few years ago (5 yrs of partic). He began taking RMD's in 2007.

If the plan allows for in-service distributions at NRA could he take an in-service distribution even though he is taking RMDs?

If this is possible, can his RMD go down based on the in-service withdrawal? We think not.

I assume you are also managing the effects of 415 limits, plus any additional accruals for service.

If the RMD plus inservice distributions are less than the equivalent annual benefit, then the next year benefit will increase.

If the distributions from both sources are more than the equivalent annual benefit, then the next year benefit will decrease.

The next RMD will be computed accordingly.

[Dougsbpc]

Thanks Blinky and Socal

The government should be getting mighty fat with all that extra cake they are getting from DB RMDs since 2006.

In this case we were just not sure about an in-service withdrawal as the 401(a)(9) regs indicate that the annuity must be non-decreasing. This guy is not at his 415 limit but is accruing additional benefits so his RMD is going up.

What happens if the participant dies while taking RMDs from a DB. Could his primary beneficiary (spouse) elect a lump sum distribution or is she stuck with the 50% J & S which the RMDs are based on?

[SoCalActuary]

Thanks Blinky and Socal

The government should be getting mighty fat with all that extra cake they are getting from DB RMDs since 2006.

In this case we were just not sure about an in-service withdrawal as the 401(a)(9) regs indicate that the annuity must be non-decreasing. This guy is not at his 415 limit but is accruing additional benefits so his RMD is going up.

What happens if the participant dies while taking RMDs from a DB. Could his primary beneficiary (spouse) elect a lump sum distribution or is she stuck with the 50% J & S which the RMDs are based on?

In the govt viewpoint, this is forcing additional taxable income on 5% business owners, so it gets taxed as higher marginal tax rates. Mighty fat?? I doubt it, but there is no sympathy at the IRS or the class-warfare politicians for risk-takers.

As to the increasing/non-decreasing annuity issue, I work with a number of small employers who want to manage their retirement distributions to their best interests. Sometimes, they want or need more than the RMD. Sometimes (actually often) they resent having to take anything, so they want the lowest possible numbers. So I have tried to have enough tools to help with these needs. Generally, it was much more flexible when we could use the lump sum rules on DB plans, so we had a lower minimum.

Now, the lowest possible payments involve an election with a joint benefit (with a very young spouse if you have a choice), using an automatic cost-of-living increase with the highest possible cola adjustment. Obviously, the highest possible rate is to take the full lump sum present value.

Now my take on the death benefit issue is that it is governed by the election signed by the participant.

It is safest for small employers to have an election that is a ONE-YEAR-ONLY election to take an annuity payment in the form of some type annuity. This preserves their ability to deal with a changed election in the following year, such as a desire for complete liquidation and the largest possible rollover balance.

But some advise to take a permanent election, such as a guaranteed payment option for an exact term of years, not to exceed the joint life expectancy. This can provide substantial protection from spendthrifts, and preserves the most funds for beneficiaries when the participant is in poor health.

I have also seen some insurance agents claim that the participant should take larger RMD payments and buy life insurance with the excess payment, on the assumption that the life insurance is priced on more favorable assumptions of mortality and interest than the plan's assumptions.

Good luck sorting all the choices out.