Distribution of Plan Assets to the Participant

As noted above, P usually should not withdraw Plan assets before reaching 59 1/2 to avoid the 10% penalty tax, and must take required minimum distributions after reaching the RBD to avoid the 50% tax (these required distributions provide a floor, not a ceiling; P is always free to withdraw more than the minimum amount).

The required minimum distribution is determined actuarially; basically, P divides the amount of assets held in the Plan in any given year by his or her remaining life expectancy. P must elect either to use a fixed life expectancy or to recalculate it each year. By recalculating, P obtains greater deferral during his or her life, but may adversely affect beneficiaries' deferral after P's death (discussed below). If P does not make an affirmative election, P will be deemed to have irrevocably elected to recalculate. P also may have the option of using the joint lives of P and the beneficiary named in the Plan beneficiary designation, which reduces the required minimum distribution each year because the life expectancy is longer.

However, P can only use joint life expectancy if P has a "designated beneficiary" (DB). Designated beneficiary is a tax term of art; it means the beneficiary named on the beneficiary designation form on the earlier of P's death or RBD, but only if that beneficiary is an individual. In other words, P can have an actual beneficiary, but not a DB, if P names a charity or P's estate. A trust must qualify as a DB, but only if it is drafted to meet certain tax requirements. If P has named several beneficiaries, each must be an individual (or qualifying trust) for P to have a DB. If several beneficiaries are named, the oldest beneficiary's life expectancy is used. Finally, if P names an individual other than P's spouse, that individual will be deemed to be no more than 10 years younger than P for purposes of determining P's minimum required distributions.

Once P has reached the RBD and a DB has been determined, P cannot later change to a younger DB in order to increase the amount of deferral. However, if P later changes to an older beneficiary, or to a non-individual, that new beneficiary's life expectancy will be used and the amount of deferral decreases. In other words, P cannot help, but can only hurt, himself or herself by changing beneficiaries after the RBD.