Jason Lacey/Steve Smith - Wichita State University

Report
Key Concepts for Required
Minimum Distributions from IRAs
and Qualified Retirement Plans
Steven P. Smith & Jason P. Lacey
May 20, 2014
Hinkle Law Firm LLC
301 North Main
Suite 2000
Wichita, Kansas 67202-4820
(316) 267-2000
www.hinklaw.com
Foulston Siefkin LLP
1551 N. Waterfront Parkway
Suite 100
Wichita, Kansas 67206
(316) 267-6371
www.foulston.com
Some Numbers

Retirement plans have lots of money
IRAs hold an estimated $4 trillion
 401(k) and other qualified plans hold an estimated
$3.2 trillion



Most of that money was contributed on a pretax basis
That means that it has not yet been taxed
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May 2014
Taxes Must be Paid


Sooner or later, this money must be taxed
The “required minimum distribution” rules are
designed to make sure that, sooner or later, this
money does get taxed
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May 2014
Focus of the RMD Rules

The RMD rules focus on two questions:
When does the money have to start coming out?
 How much money has to be taken out each year?


In other words, how long can the process be dragged out?
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May 2014
Application of the RMD Rules

The RMD rules apply to:
Individual retirement accounts (IRAs)
 401(k) and other qualified plans
 403(b) plans
 457(b) plans


There are some variations in how the rules apply to
each of these, but, for the most part, the rules are
the same
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May 2014
Sources of Law

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Code § 401(a)(9) applies to qualified plans
Code § 408(b)(6) provides that rules “similar to”
401(a)(9) apply to IRAs
Code § 403(b)(10) provides that rules “similar
to” 401(a)(9) apply to 403(b)s
Code § 457(d)(2) provides that a 457(b) plan
must meet the requirements of 401(a)(9)
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May 2014
Regulations

Proposed regulations were issued in
1987
 2001


Final regulations were issued in 2002
The 2002 regulations also included one section that
was issued in temporary form
 That section was finalized in 2004


The 2002 / 2004 final regulations apply to all
calendar years after 2002
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May 2014
RMD Rules Set Outer Limits

The RMD rules establish
The latest possible distribution date, and
 The minimum possible distribution

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May 2014
Qualified Plans
– Commencement Dates


Qualified plans do not have to wait until the
latest possible distribution date before
commencing benefits
Many (and probably most) plans require
distributions to commence if a participant has
Terminated employment, and
 Attained age 65

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May 2014
Qualified Plans
– Installment Distributions

Many 401(k) plans require participants to take
their benefits in the form of a lump sum
payment
This payment can be rolled over to an IRA
 Payments can be taken from the IRA in installments

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May 2014
DISTRIBUTIONS BEFORE
DEATH
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May 2014
When do payments
have to begin?


No later than the “required beginning date”
(“RBD”)
RBD is generally April 1 of the calendar year
following the later of the calendar year in which:
The payee attains age 70½, or
 The participant terminates employment with the
employer maintaining the plan (in the case of an
employer-sponsored plan)


But only if the payee is not a 5% owner
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May 2014
Example

Assume the following:
Mary Ann’s 70th birthday is today (May 20, 2014)
 She has money in IRAs with:

First National Bank
 Fidelity
 Vanguard

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May 2014
Required Beginning Date

How long can Mary Ann wait before she has to
start taking money out of her IRAs?
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May 2014
Mary Ann’s RBD

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Her RBD is the April 1 of the first calendar year
beginning after the calendar year in which Mary
Ann turns 70½
Mary Ann will be 70½ in November 2014
This means that


Her RBD is April 1, 2015
Her first distribution calendar year is 2014
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May 2014
Mary Ann’s First
Distribution Calendar Year

Why is her first distribution calendar year 2014
(and not 2015)?
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May 2014
Distribution Calendar Year

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A “distribution calendar year” is a calendar year
for which a distribution must be made
When an individual turns 70½, a distribution
must be made for that calendar year


Exception may apply if the individual is still working
for the employer sponsoring the plan
Although the individual’s RBD is April 1, the
distribution that must be made by April 1 is
actually on account of the previous calendar year
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May 2014
First Payment

How much does Mary Ann have to take in her
first payment?
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May 2014
Mary Ann’s First Payment

The amount of Mary Ann’s first payment
depends on her life expectancy factor
This is set forth in the Uniform Lifetime Table
 A different table will apply if she has a spouse who is
more than 10 years younger

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May 2014
Mary Ann’s First Payment

The Uniform Lifetime Table provides a
distribution period based on the participant’s age
Age is determined as of the birthday that falls within
the distribution calendar year
 Mary Ann will be 70 on her 2014 birthday


Remember: Although her RBD is April 1, 2015, her first
distribution calendar year is 2014
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May 2014
Mary Ann’s First Payment
– How Much?

To determine how much Mary Ann has to take,
her account balance is divided by her
distribution period under the Uniform Lifetime
Table
Under the Uniform Lifetime Table, her distribution
period is 27.4
 If her account balance is $100,000, her distribution
for 2014 would be:


$100,000 / 27.4 = $3,649.64
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May 2014
Mary Ann’s First Payment
– What Account Balance?

When we calculate the payment that Mary Ann
has to receive by her RBD, what account
balance do we use?

In other words, the account balance as of what date?
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May 2014
Valuation Calendar Years

The account balance for purposes of determining
the required minimum distribution for a
distribution calendar year is




The account balance
As of the last valuation date
In the calendar year immediately preceding the
distribution calendar year
For most plans, this will be December 31

Special rules may apply if the valuation date is not
December 31
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May 2014
Mary Ann’s First Payment

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Mary Ann’s RBD is in 2015
The payment she must receive is for 2014
Her valuation calendar year for this payment is 2013
So her required payment for 2014 must be based on
her 2013 account balance


Normally, this will be the balance as of the last day of
the year
Note that the balance is not adjusted for distributions
made after 12/31/13
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May 2014
Mary Ann’s First Payment
– Which IRAs?



Is Mary Ann required to take a distribution from
each of her IRAs?
The RMD rules allow IRAs to be aggregated
So, the RMD rules will be satisfied as long as the
total amount taken from any combination of her
IRAs is enough to satisfy her required
distribution for her distribution calendar year
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May 2014
Subsequent Years

The required distribution for each distribution
calendar year after the first distribution calendar
year must be taken by December 31 of that
calendar year

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This means that Mary Ann’s distribution for 2015 must
be taken by 12/31/2015
The April 1 deadline applies only to her first distribution
calendar year
If she waits until 2015 to receive her distribution for
2014, she could (and probably will) end up receiving two
distributions in the same calendar year
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May 2014
401(k) Plans

What if Mary Ann also had balances in three
separate 401(k) plans?
401(k) plans are not aggregated
 This means that required distributions must be
separately calculated for each 401(k) plan

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May 2014
Working Past Age 70

What if Mary Ann is still working?

No impact on required distributions from
IRAs
 401(k) plans of former employers


But distributions are not required from the 401(k)
plan of her current employer
Unless she is also a 5% owner
 This is true even if she is only working part-time

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May 2014
Roth Money

What if one of the IRAs is a Roth IRA and Mary
Ann has made Roth deferrals in one of the
401(k) plans?
Roth IRAs are not subject to the RMD rules while
the account holder is still alive
 But Roth money in a 401(k) plan is treated the same
as any other money for purposes of the RMD rules

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May 2014
Roth Money


What can Mary Ann do to avoid having to receive
distributions of the Roth money in the 401(k)
plans?
Mary Ann may want to roll that money over to a
Roth IRA

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Unless the Roth money is in the 401(k) plan of her
current employer and she is not a 5% owner
To avoid having to receive a distribution for the
2014 calendar year, she may want to complete the
rollover before the end of 2013
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May 2014
Planning Opportunities
– Delaying Distributions

What if Mary Ann is still working and wants to
delay distributions as long as possible?
Mary Ann may wish to roll her other 401(k) money
and the money in her IRAs into the 401(k) plan of
her current employer
 This assumes

The plan accepts rollovers
 She is not a 5% owner
 The plan has reasonable investment choices

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May 2014
Consequences of
Not Taking an RMD

What if Mary Ann fails to receive a required
distribution from one of her 401(k) plans by her
RBD?
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May 2014
Consequences of
Not Taking an RMD


She is subject to an excise tax
Excise tax is 50% of the amount that should
have been paid but was not

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Form 5329 must be attached to taxpayer’s return for
the year in which the amount should have been paid
The 50% excise tax is in addition to the tax that
will be owed as a result of including the
distribution in her taxable income
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May 2014
Waiver of Excise Tax
– by the Plan

The 401(k) plan can apply for a waiver of the
excise tax on her behalf
The IRS has a specific procedure for this
 But the plan is not required to request a waiver

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May 2014
Waiver of Excise Tax
– Requested by Individual

Mary Ann may request a waiver of the excise tax


Waiver must be requested using Form 5329
Excise tax may be waived if the shortfall was
Due to reasonable error, and
 Taxpayer is taking reasonable steps to remedy the
shortfall

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May 2014
Waiver of Excise Tax
– Automatic Waiver

Excise tax will automatically be waived if
Participant dies before his/her required beginning
date
 The beneficiary is an individual, and
 The participant’s total benefit is distributed to the
beneficiary by

the last day of the fifth calendar year
 following the year of death

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May 2014
DISTRIBUTIONS AFTER
DEATH
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May 2014
Already in Pay Status

What if Mary Ann begins taking distributions in
2015 but dies in 2016?

Year of Death – assume she lived until December 31


Pay to beneficiary if she did not take a distribution before
death
Later Years – pay over her remaining life expectancy
or, if longer, the life expectancy of her “designated
beneficiary”
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May 2014
Death Before Payment Begins

What if Mary Ann died in 2013?
5-Year Rule – Distribute all within 5 years
 Life Expectancy Rule – If she has a designated beneficiary,
begin by the end of the year after death and pay over
beneficiary’s life expectancy
 Spouse Rule – If her spouse is her beneficiary, begin by
the later of (1) end of the year after death, or (2) end
of the year she would have been 70½, and pay over
spouse’s life expectancy

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May 2014
Designated Beneficiary

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General Rule – Must be an individual designated
under the plan or IRA
Can be an affirmative designation or designation
by default under plan/IRA terms
Certain trusts can count as “individuals”
Determine on September 30 of year following
year of death (must have also been a beneficiary
as of date of death)
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May 2014
Why Does It Matter?

Assume Mary Ann dies in 2013 and names:
Her estate
 Her 20-year-old granddaughter
 A trust of which her three children are the sole
beneficiaries
 A trust of which her three children and a charity are
the beneficiaries

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May 2014
MISCELLANEOUS
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May 2014
Non-Spouse Beneficiaries

Mary Ann names her daughter as sole beneficiary of
her 401(k) account and dies before her RBD



General Rule – Could use life-expectancy payout over
daughter’s life
But what if the plan only allows lump-sum distributions?
Her daughter can


Roll over the distribution to an inherited IRA
Take installment distributions from the inherited IRA
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May 2014
Forms Not Returned


Ginger dies in 2011
At the time of her death, she was
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69 years old
not married, and
had not commenced benefits from her 401(k) plan
Her beneficiary form designated her two adult
children as her beneficiaries
However, her children did not return the forms that
were needed to process a distribution until 2013
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May 2014
Is there a problem?

Under the plan’s RMD provisions, distributions
to a non-spouse beneficiary should have
commenced by December 31, 2012

In other words, by the end of the calendar year
following the year of death
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May 2014
What should have happened?


The plan provided that the default form of distribution
for a non-spouse beneficiary would be installment
payments over the beneficiary’s life expectancy
However, the plan also provided that beneficiaries could
elect to apply the five year rule instead if they did so by
September 30 of the calendar year in which distribution
was required to begin


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Under Reg. § 1.401(a)(9)-3, Q&A-4(c), the latest possible date
for making an election would be December 31
But, in this example, the plan is requiring an election to be
made as of an earlier date
This is not uncommon in our experience
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May 2014
What should have happened?

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Ginger died in 2011
So distributions were required to begin by
December 31 of the year following Ginger’s
death, i.e., December 31, 2012
This means that the deadline to elect the five
year rule was September 30, 2012
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May 2014
Deadline missed – What next?



Because this deadline was missed, it is too late
for the beneficiaries to elect to follow the 5 year
rule
This means that they each needed to take a
required payment for 2012
Because the 2012 payment will not be made
until 2013 (at the earliest), they will be exposed
to the 50% excise tax on that payment
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May 2014
Separate Accounts?

The beneficiaries could have elected to establish
separate accounts



This would allow each of them to use their own life
expectancy
Otherwise, the life expectancy of the oldest beneficiary
must be used
However, the deadline for establishing separate
accounts for this purpose was the last day of the
year following the calendar year of the participant’s
death

That is, December 31, 2012
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May 2014
Separate Accounts?

Separate accounts may still be established, but,
because this deadline was missed, each
beneficiary will have to use the life expectancy
of the oldest beneficiary
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May 2014
Rollover to Inherited IRA?


The two beneficiaries should be able to accelerate
their remaining distribution and roll them over into
their own inherited IRAs
Note, however, that



They cannot rollover their required payments for 2013
even though they are not required to receive those
payments until December 31, 2013
They need to take their required payment for 2013
before they make a rollover
They are still locked in to taking installment distributions
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May 2014
Defined Benefit Plans



A qualified plan that is also a defined benefit
plan is subject to the RMD rules
Because a defined benefit plan provides ongoing
monthly payments, it will almost always satisfy
the RMD rules if payments are commenced at
the right time
The most common problem:

A participant dies, but no one tells the plan
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May 2014
DB Plan - Example




Participant dies in 1994
Upon his death, a death benefit becomes payable to his wife
But no one tells the plan that he has died
Two years later, his wife also dies




She died intestate
She had one surviving son
No estate was ever opened
The plan finds out about his death in 2005


This was after the son was released from the state penitentiary
Apparently he didn’t want to receive money while he was locked
up because he was afraid he might not get to keep it
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May 2014
What should the plan do?

Death benefit is owed and must be paid
Upon the participant’s death, the death benefit
became payable to his surviving spouse
 The right to receive that payment passed to her
estate upon her death
 Under state law, because a formal estate was never
opened, her surviving son was entitled to receive the
payment based on his affidavit of heirship

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May 2014
Example – Excise Tax

50% excise tax is still owed!


Payment was not made within the RBD for a nonspouse
beneficiary
Should have been paid to the surviving son no later than
the end of the fifth calendar year following the date of
the wife’s death
She died in 1996
 So by the end of 2001


To avoid the excise tax, the surviving son will have
to request a waiver from the IRS using Form 5329
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May 2014
Thank You

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