Tax Planning for Retirees

Required Minimum Distributions for Plans and IRAs

Suspension of Minimum Distribution Requirements for 2009. – Congress has eliminated minimum distribution requirements for IRAs and defined contribution plans for the year 2009. Thus, a retiree who chooses to take distributions in 2009 from an IRA or defined contribution plan may transfer or roll over even the portion that would have been a required minimum distribution absent the suspension. Although a plan or IRA is not required to make trustee-to-trustee transfers of such suspended amounts, it may do so if it chooses. In addition, the direct distribution of such amounts to a retiree by a defined contribution plan is not subject to the normal 20 percent tax withholding, and the retiree may elect to eliminate other types of withholding tax.

However, this provision does not affect a retiree’s required beginning date for distributions. For example, a retiree whose required beginning date is April 1, 2010 need not take a minimum distribution for 2009. However, the retiree must take the required minimum distribution for 2010 no later than the last day of that year. Even after the retiree’s death, the retiree’s beneficiary must also use the retiree’s normal required beginning date to determine the applicable method for determining minimum distributions. In addition, if the five-year minimum distribution rule applies to a beneficiary, the beneficiary does not count 2009 as one of the five years. For example, the five-year period ends in 2012, instead of 2011, for a retiree who died in 2006. (I.R.C. § 401(a)(9)(H).)

Other collateral effects of the suspension include the following:

1.  Any 2009 deadline for an election of the five-year distribution rule or the life expectancy rule is extended until the end of 2010.

2.  A nonspouse beneficiary of a decedent dying in 2008 (who participated in a plan requiring use of the five-year distribution rule) has until the end of 2010 to make a direct rollover to an IRA and elect the life expectancy rule.

3.  Spousal consent to the 2009 suspension of required minimum distributions is generally not required if the parties did not choose a new annuity starting date.

4.  The suspension of required minimum distributions for 2009 does not suspend periodic payments that allow a retiree to avoid the 10 percent penalty tax on premature distributions.

(I.R.C. § 401(a)(9)(H); Notice 2009-82, 2009-2 C.B. 491.) See Chapter 8 of the treatise for a discussion of required minimum distributions.

Minimum Distribution Flexibility for Certain Government Plans. –  Proposed regulations indicate that qualified governmental plans and eligible state/local plans have more latitude in complying with minimum distribution requirements than other types of plans. The proposed regulations treat these government plans as satisfying minimum distribution requirements if the plans comply with a reasonable and good faith interpretation of the Code – apparently, even if that interpretation is contrary to regulatory provisions. (Prop. Reg. § 1.401(a)(9)-1, Q&A 2(d).) See Chapter 8 of the treatise for minimum distribution requirements.

Beneficiary Designation by Judicial Reformation. – Beneficiaries of tax-favored retirement plans qualifying as “designated beneficiaries” may be eligible for longer distribution periods than other beneficiaries. However, a retiree may fail to properly name a designated beneficiary. In a private ruling, the IRS allowed an individual to become a designated beneficiary by reason of a state court reformation of a beneficiary designation form, at least where convincing evidence indicated that was consistent with the retiree’s original intention. However, in a more recent ruling, the IRS refused to recognize a trust reformation that attempted to eliminate non-individual beneficiaries of an IRA and thereby allow the post-mortem “creation” of designated beneficiaries. (Ltr. Ruls. 200616039 and 201021038.) See Chapter 8 of the treatise for a discussion of designated beneficiaries.

Separate Accounts Unavailable When Beneficiary Is a Decedent’s Estate. –Beneficiaries of a decedent’s estate may not treat as separate accounts their interests in a plan or inherited IRA held by them indirectly through the estate. “See through” rules do not apply to an estate. Thus, required minimum distribution rules are applied to such a plan or inherited IRA as a whole. The minimum distribution rules are applied in the aggregate even if funds in the plan or inherited IRA are directly transferred to several new inherited IRAs, each for the benefit of an individual beneficiary of the estate. (Ltr. Rul. 201128036.) See Chapter 8 of the treatise.

Non-Spouse’s Minimum Distribution Election Under Personally Purchased Annuity. – The tax law requires that a non-spouse beneficiary receive minimum distributions under a personally purchased annuity contract. However, the IRS has ruled that those minimum distribution requirements may be satisfied if a non-spouse beneficiary merely elects to be treated for tax purposes as if he or she had received the entire value of the annuity contract as of the retiree’s death. (Ltr. Rul. 201302015.) See Chapter 16 of the treatise for a discussion of personally purchased annuities.

Deaths of Decedent and Surviving Spouse in Quick Succession. – A retiree and his or her surviving spouse may both die within a short period of time, with the longer living spouse being the designated beneficiary of the retiree’s IRA. In that case, a disclaimer of the IRA by the executor of the now deceased surviving spouse may allow IRA distributions over the life expectancy of a younger successor beneficiary (rather than the shorter life expectancy of the surviving spouse). (Ltr. Rul. 201202042.) See Chapters 8 and 20 of the treatise for a discussion of disclaimers and minimum distributions.

Delayed Minimum Distribution Payments. – Tax-favored plans and arrangements generally must begin making minimum distributions to a retiree or beneficiary by a specified date. The IRS cannot  waive a delay in the making of a payment. However, the IRS may waive a penalty resulting from the delay if the delay was due to reasonable error that the retiree or beneficiary is taking reasonable steps to correct. (Ltr. Rul. 201417027.) See Chapter 8 of the treatise.

Lump Sum Accelerations of Pension Plan Annuities No Longer Allowed. – After July 8, 2015, qualified defined benefit plans generally cannot be amended to allow the replacement of any currently paid annuity with a lump sum payment or other accelerated form of distribution. However, some plan amendments may be grandfathered if certain types of specific actions were taken before July 9, 2015. (Notice 2015-49, 2015-30 I.R.B. ___.) See Chapter 8 of the treatise.

Purchase of Qualifying Longevity Annuity Contracts (QLACs). – New regulations authorize “qualifying longevity annuity contracts” (QLACs) that provide additional tax deferral for certain retirement plans and IRAs. The regulations allow deferral of QLAC payments until an advanced age. In addition, earlier required minimum distributions are necessarily smaller because the regulations exclude the value of QLACs from the account balance used to compute minimum distributions. Perhaps most importantly, QLACs provide some additional financial security for participants who outlive their life expectancies or suffer downturns in the equity markets.

A QLAC may be purchased for a plan participant by a qualified defined contribution plan, an eligible state/local government plan, or an IRA (other than a Roth IRA). A QLAC may start no later than the first day of the month after the participant attains age 85. The aggregate premiums for all QLACs benefiting a participant may not exceed certain dollar and percentage limitations. The QLAC must also satisfy all the usual minimum distribution requirements for annuities (other than starting by the required beginning date). (Treas. Reg. § 1.401(a)(9)-6, Q&A 17.) See Chapter 8 of the treatise.