Tax — Publication 575 — Pension and Annuity Income

To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date (defined later). The pay- ments each year can’t be less than the RMD.

If the actual distributions to you in any year are less than the RMD for that year, you are subject to an additional tax. The tax equals 25% of the part of the RMD that wasn’t distributed.

For this purpose, a qualified retirement plan includes:

A qualified employee plan,
A qualified employee annuity plan,
An eligible section 457 deferred compensation plan, or
A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).

Reduced tax rate for excess accumulations. You may be subject to a reduced additional tax rate of 10% of the amount not distributed if, during the correction window, you take a distribution of the amount on which the tax is due and submit a tax return reflecting this additional tax.

The “correction window” ends on the earliest of the following dates.

The date of mailing the deficiency notice with respect to the imposition of this tax.
The date the tax is assessed.
The last day of the second tax year that begins after the date of the tax year in which the additional tax is imposed.

Waiver. The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. If you believe you qualify for this relief, you must file Form 5329. Enter “RC” and the amount you want waived in parentheses on the dotted line(s) next to line(s) 54a and/or 54b, as applicable, and attach a letter of explanation. Subtract this amount from the total shortfall you figured without regard to the waiver and enter the result on line(s) 54a and/or 54b, as applicable.

State insurer delinquency proceedings. You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. If your payments are reduced below the minimum because of these proceedings, you should contact your plan administrator. Under certain conditions, you won’t have to pay the 25% tax.

Required beginning date. Unless the rule for 5% owners applies, you must generally begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of:

The calendar year in which you reach age 73, or
The calendar year in which you retire from employment with the employer maintaining the plan.

However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which you reach age 73 even if you haven’t retired.

5% owners. If you are a 5% owner, you must begin to receive distributions from the plan by April 1 of the year that follows the calendar year in which you reach age 73. This rule doesn’t apply if your retirement plan is a governmental or church plan.

You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 73, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer.

Required distributions. By the required beginning date, you must either:

Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or
Begin receiving periodic distributions in annual amounts calculated to distribute your entire interest

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(for a tax-sheltered annuity, your entire benefit accruing after 1986) over your life or life expectancy or over the joint lives or joint life expectancies of you and a designated beneficiary (or over a shorter period).

After the starting year for periodic distributions, you must receive at least the RMD for each year by December 31 of that year. (The starting year is the year in which you reach age 73 or retire, whichever applies in determining your required beginning date.) If no distribution is made in your starting year, the RMDs for 2 years must be made the following year (one by April 1 and one by December 31).

If you are an employee with a designated Roth ac-

TIP count, you aren't required to take distributions

from the designated Roth account at any age. These RMD rules don't apply to your designated Roth ac- count during your lifetime.

Distributions after the employee’s death. If the employee was receiving periodic distributions before their death and the employee dies after the required beginning date, any payments not made as of the time of death must generally be distributed at least as rapidly as under the distribution method being used at the date of death.

In addition, if distributions are being made from a defined contribution plan and the employee’s beneficiary is not an eligible designated beneficiary, any payments not made as of the time of death must be distributed within 10 years after the death of the employee. An eligible designated beneficiary is the employee’s spouse, the employee’s child who has not reached majority, a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the employee. If the employee dies before the required beginning date, the entire account must be distributed under one of the following rules.

Rule 1. The distribution must be completed by December 31 of the 5th year following the year of the employee’s death if the employee was a participant in a defined benefit plan or if there’s no designated beneficiary.
Rule 2. The distribution must be completed by December 31 of the 10th year following the year of the employee’s death if the employee was a participant in a defined contribution plan and designated an individual as the beneficiary under the plan.
Rule 3. The distribution must be made in annual amounts over the life of an individual designated as a beneficiary under a defined benefit plan or life expectancy of an eligible designated beneficiary under a defined contribution plan.

The terms of the plan may determine which of these three rules applies. If the plan permits the employee or the eligible designated beneficiary to choose the rule that applies, this choice must be made by the earliest date a distribution would be required under either of the rules. Generally, this date is December 31 of the year following the year of the employee’s death.

If the employee or the eligible designated beneficiary didn’t choose a rule and the plan doesn’t specify the rule

that applies, distributions must be made under Rule 3 if the employee has an eligible designated beneficiary (or in the case of a defined benefit plan, an individual was designated as the beneficiary under the plan) or under Rule 2 if the employee was a participant in a defined contribution plan, and has designated an individual as the beneficiary under the plan, but that individual isn’t an eligible designated beneficiary. If an employee doesn’t have a designated beneficiary, distribution must be made under Rule 1.

Distributions under Rule 3 must generally begin by December 31 of the year following the year of the employee’s death. However, if the surviving spouse is the beneficiary, distributions need not begin until December 31 of the year the employee would have reached age 73, if later.

If the surviving spouse is the designated beneficiary and distributions are to be made under Rule 3, a special rule applies if the spouse dies after the employee but before distributions are required to begin. In this case, distributions may be made to the spouse’s beneficiary under either Rule 1, Rule 2, or Rule 3 as though the beneficiary were the employee’s beneficiary and the employee died on the spouse’s date of death. However, if the surviving spouse remarries after the employee’s death and the new spouse is designated as the spouse’s beneficiary, this special rule applicable to surviving spouses doesn’t apply to the new spouse.

If distributions from a defined contribution plan began under Rule 3 and the eligible designated beneficiary dies or a beneficiary who is a minor child reaches majority, distributions must be completed by December 31 of the 10th year following the year of the beneficiary’s death or the child reaching majority.

Minimum distributions from an annuity plan. Special rules may apply if you receive distributions from your retirement plan in the form of an annuity. Your plan administrator should be able to give you information about these rules.

Minimum distributions from an individual account plan. Your plan administrator should be able to give you information about how the amount of your RMD was figured.

If there is an account balance to be distributed from your plan (not as an annuity), your plan administrator must figure the minimum amount that must be distributed from the plan each year.

What types of installments are allowed? The minimum amount that must be distributed for any year may be made in a series of installments (for example, monthly or quarterly) as long as the total payments for the year made by the date required aren’t less than the minimum amount required for the year.

More than minimum. Your plan can distribute more in any year than the minimum amount required for that year; but if it does, you won’t receive credit for the additional amount in determining the minimum amount required for future years. However, any amount distributed in your starting year will be credited toward the amount required to be distributed by April 1 of the following year.

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Combining multiple accounts to satisfy the minimum distribution requirements. Generally, the RMD must be figured separately for each account. Each qualified employee retirement plan and qualified annuity plan must be considered individually in satisfying its distribution requirements. However, if you have more than one tax-sheltered annuity account, you can total the RMDs and then satisfy the requirement by taking distributions from any one (or more) of the tax-sheltered annuities.