Rules and Exceptions to the Three RMD Rules

Barbara Webb

Central to the rules around required minimum distributions (RMDs) is the terminology. Here are a few key examples:

Attainment of Age 70½

A participant attains the age of 70½ as of the date that is six calendar months after the participant’s 70th birthday.

What Is the Required Beginning Date?

A participant’s required beginning date is a key date in determining the amount of a required minimum distribution during the participant’s lifetime and in determining death distributions after the participant’s death. The definition of required beginning date varies depending upon the type of plan.

For example, an IRA participant’s RBD is the April 1 of the calendar year following the calendar year in which the participant attains the age of 70½. However, the RBD for “non-five percent owners” owners participating in an employer plan is the April 1 of the calendar year following the later of the calendar year in which the participant attains the age of 70½ or the calendar year in which the participant retires from employment with the employer maintaining the plan. “Five percent owners” have the same RBD as IRA participants.

What Is the Distribution Calendar Year?

The distribution calendar year is any calendar year for which the participant or beneficiary has an RMD.

If the participant’s RBD is the April 1 of the year following the year in which the participant attains the age of 70½, such participant’s first distribution calendar year is the calendar year the participant attains the age of 70½.

If the participant’s RBD is the April 1 of the year following the year in which the participant retires (employer plans), such participant’s first distribution calendar year is the calendar year the participant retires or otherwise separates employment with the employer maintaining the plan.

The required minimum distribution for subsequent distribution calendar years must be made no later than Dec. 31 of each subsequent year. Thus, when a participant delays taking his or her first distribution calendar year’s minimum amount until the following April 1 (the RBD), the required minimum distribution for the second distribution calendar year must be taken in the same year on or before Dec. 31. In this case, the participant includes in gross income in one tax year the required minimum distribution amounts for two years.

How Is the Account Balance Determined?

The account balance used in calculating the required minimum distribution for any distribution calendar year is generally the account balance as of the prior Dec. 31. Final regulations eliminated account balance adjustments except for outstanding rollovers, outstanding transfers, recharacterizations, and annuity purchases during the year. (If an annuity is purchased during the year with only a portion of the plan’s assets, then the required minimum for the non-annuity portion based on the regulations is calculated using the balance on the prior Dec. 31, similar to any other calculation of the RMD.)

Plans under Internal Revenue Code Section 403(b) also are subject to special rules for determining the account balance of the participant that is subject to these required minimum distribution rules. These special rules are referred to as the “Post-’86 account balance” and the “Pre-’87 account balance,” also referred to as “bifurcated accounts.”

The required minimum distribution amount must be calculated separately for each IRA and 403(b). However, such amounts may then be totaled and the total required minimum distribution taken from any one or more of the participant’s IRAs or 403(b)s. In the case of employer plans besides 403(b)s, however, if a participant is covered under more than one plan, each plan must separately satisfy the required minimum distribution from each such plan, minimums may not be aggregated. It should be noted that although the aggregation rules are the same for IRAs and 403(b)s, they may not be aggregated with each other.
Now let’s look at the main distinctions between the three rules.

1. Alive on Required Beginning Date (RBD)

The general rule in the statute that applies to all plans is that:

• The entire balance of the participant must be distributed not later than the participant’s RBD, or
• The entire balance of the participant must begin to be distributed not later than the participant’s RBD over the life of the participant or joint lives of the participant and the “designated beneficiary,” or over a period not extending beyond the life expectancy of the participant or the joint life and last survivor expectancy of the participant and the “designated beneficiary.”

Required minimum distributions during the participant’s lifetime from a defined contribution qualified plan, an IRA or a §403(b) plan is generally determined by dividing the participant’s account balance by an applicable distribution period using the "Uniform Lifetime Table.” Regardless of who or what is the participant’s beneficiary, a participant is assumed to have a designated beneficiary exactly 10 years younger. The exception is where the participant’s spouse is the sole beneficiary AND is more than 10 years younger than the participant, required minimum distributions are recalculated each year using the Joint and Last Survivor Table.

2. Death Before RBD

The following rules apply for determining required minimum distributions when the participant dies before the required beginning date, even if distributions have already commenced to the participant before death. Since the participant dies before the required beginning date, there is no RMD for the year of death.
Distribution of the participant’s balance must be distributed to the beneficiary under one of the following methods.

The 5-Year Rule:

The entire account balance must be distributed no later than the Dec. 31 of the calendar year that contains the 5th anniversary of the participant’s death, regardless of who or what entity receives the distribution. For example, Michael dies on Jan. 10, 2017. Under the 5-year rule, the entire account balance must be distributed no later than Dec. 31, 2022.

The Life Expectancy Rule:

If the participant has a “designated beneficiary” (DB) determined as of the Sept. 30 of the calendar year following the calendar year in which the participant dies, death distributions are made over the single life expectancy of such designated beneficiary. Additional rules apply to multiple beneficiaries and separate accounts for each beneficiary.

3. Death on or After RBD

If the participant has a designated beneficiary by the date for determining the DB, required minimum distributions beginning for the calendar year following the year of death are determined by using the longer of the single life expectancy of the designated beneficiary or the single life expectancy of the deceased participant. (This rule benefits an older beneficiary.) If the single life expectancy of the designated beneficiary is longer, special rules apply in determining the RMD for subsequent calendar years depending on the relationship of the DB to the deceased participant as outlined below:

Non-spouse designated beneficiary: The single life expectancy of the non-spouse beneficiary is based upon such beneficiary’s birthday in the calendar year following the calendar year in which the participant died. For subsequent calendar years, determine the single life expectancy by reducing the beneficiary’s single life expectancy by one year for each year that lapses thereafter.

Spouse as sole beneficiary: The single life expectancy of the spouse beneficiary is based upon the spouse’s birthday in the calendar year following the calendar year in which the participant died. For subsequent calendar years, determine the single life expectancy by redetermining the spouse’s single life expectancy each year.

If the single life expectancy of the deceased participant is longer, determine the single life expectancy in the year of death and reduce that divisor by one each year.

The restrictions of this article permit me to merely touch on the basics. All of the twists, turns, and exceptions could (and do!) fill volumes. While it is helpful to collect as much data as possible – participant, beneficiary or beneficiaries, date of death, age of all parties in the year of death, prior distribution history, etc., etc,. — RMDs before and after death are complicated and should be determined with assistance from an experienced professional.

Barbara Webb, TGPC, of PenServ Plan Services, Inc., is a member of the NTSA Communications Committee.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA or its members.