CRPC Module 7

Participant Dies After RMDs Begin with Spouse Beneficiary (Deaths on or after RBD), Option #2: Open a decedent or inherited IRA

Spousal beneficiaries can transfer the assets into an inherited IRA. Annual RMDs over the beneficiary's life expectancy must begin no later than December 31 of the year following the original account holder's death. Remember: -If the original account holder did not take their full RMD in the year of death, the remaining RMD must be taken from the account by December 31 of the year of death. RMD amounts will be income taxed to whoever receives it. For example the RMD for the year of death was $10,000. The decedent had already received $4,000 before passing away. They will be income taxed on that $4,000. The beneficiary must then withdraw the remaining $6,000 of the RMD and be income taxed on that money. -Annual distributions are spread over the spousal beneficiary's single life expectancy (determined from Table I using the beneficiary spouse's age in the calendar year following the year of death. The later years the surviving spouse will always go back to Table I each year to "recalculate" the RMD for that year. Being allowed to return to Table I each year is a major advantage only enjoyed by a surviving spouse. -The surviving spouse can choose to have the decedent's RMDs continue based on the decedent's age in the year of death and then subtract one for each passing year. Thus, the ---RMD for the year after the death would be the decedent's Table I life expectancy factor minus one. RMDs are mandatory but the beneficiary will not incur the 10% early withdrawal penalty.

Spouse Beneficiary (Deaths on or after RBD), Option #1: Transfer assets to own IRA

Spousal beneficiaries who are the sole beneficiary of a contract are categorized as spousal eligible designated beneficiaries and may choose to transfer the assets to an IRA in their own name. Remember: -The beneficiary must take the remaining RMD for the year of death (if the account holder did not take it). This is different than when the decedent was younger than the RBD. The RMD for the year of death is the Table III RMD determined on January 1 of that year. The decedent's RMD for the year of death must be fully satisfied before any money can be moved to the surviving spouse's own account. -Once the money in in the beneficiary's own retirement account, any withdrawals for beneficiaries who are under age 59½ will be subject to the same distribution rules as if the IRA had been theirs originally. They cannot take distributions from their own retirement account without paying the 10% early withdrawal penalty unless an exception applies. Now that the RBD is 73, most surviving spouses will be past age 59½. Only spouses more than about 13.5 years younger than the owner will be less than 59½. Also, most people do not die right on their RBD, thus even a spouse who is more than 13.5 years younger than the owner is still progressing toward 59½ as the owner continues to live past their RBD. -The beneficiary may designate their own IRA beneficiary.

Tax Treatment of Stock Distributions

Stock distributions trigger a tax event for a terminated plan participant. Frequently, the distributed shares will have increased in value since the employer contributed them to the participant's individual account. This increase is known as net unrealized appreciation, or NUA.

safe withdrawal rate

The 4% rule states that you withdraw no more than 4% of your starting balance each year in retirement. However, the 4% rule doesn't guarantee you won't run out of money, but it does help your portfolio withstand market downturns, by limiting how much is withdrawn. Many analysts, however, place the safe withdrawal rate at closer to 3%-3.5%, citing longevity projections, predictions of lower-than-historical stock market returns, and the current low interest rate environment.

Complicated 10-Year Rule

The Complicated 10-Year Rule is really three rules. The first rule is for the year of death. This can be thought of as "Year 0." The RMD for the year of death is the original owner's RMD from Table III. This is good because Table III assumes an additional hypothetical beneficiary who is 10 years younger than the owner of the account. If the decedent had not already withdrawn the full RMD, then the beneficiary must withdraw the remaining amount. That takes care of Year 0, the year of death. The next set of rules covers Years 1-9. Year 1 is the year after the year of the death. A designated beneficiary is more than 10 years younger than the decedent; otherwise they would be an EDB. Thus, the Year 1 RMD life expectancy factor is the Table I factor for someone the designated beneficiary's age in the year after the death. After Year 1 a designated beneficiary is never allowed to return to Table I again. The RMD life expectancy for Year 2 would be the Year 1 life expectancy factor minus one. Year 3's factor will be year 2's factor minus 1. This process runs through Year 9.

Qualified Plan Loan Defaults

The Tax Cuts and Jobs Act of 2017 (TCJA) extended the time to repay retirement plan loan defaults in two circumstances (called qualified plan loan offsets—QPLOs): if an employee separates from service or the retirement plan itself is terminated. While managing the current tax bill is usually the client's focus, additional attention should be paid to the impact repaying or not repaying the loan will have at retirement. Also, there are several ways to fund the timely repayment of certain defaulted retirement plan loans and thus preserve the principal and allow it to grow for retirement. Finally, because studies show that 86% of those separating from service with a retirement plan loan will default on the loan, financial planners have a natural key to ask about such defaults when a client separates from service. Thus, awareness of the options for QPLOs can serve two purposes: protecting the client's retirement preparation and growing the adviser's assets under management.

What is the most important thing to remember related to retirement cash flow considerations?

The adviser must help the retiree monitor the chosen plan as they move through retirement. It is essential to track changes in lifestyle or goals and make changes to the plan if necessary. Attention to changes such as higher-than-projected levels of spending should be discussed with retirees to help them understand the risks associated with depleting assets before a certain age. Keeping retirees informed of changes that affect their retirement plan and the short- and long-term implications of these changes will allow them to make necessary adjustments to put the plan back on track or, if necessary, to modify the plan accordingly.

What does the automatic rollover rule require?

The automatic rollover rules require that distributions of more than $1,000 from a qualified plan, Section 403(b) plan, or Section 457 governmental plan be paid to an IRA by means of a direct rollover, unless the participant-distributee elects to have the distribution rolled over to another retirement plan or to receive the distribution directly. In addition, the plan administrator must provide the participant-distributee with a written notice concerning this requirement.

Participant Dies Before RMDs Begin with Nonspouse Eligible Designated Beneficiary, Option #2: Distribution according to 5-year rule

The beneficiary can choose to leave assets in the original account and defer receipt of distributions until December 31 of the fifth year after the participant's death. In the fifth year, however, the beneficiary must take a distribution of the entire remaining account balance. There will be no 10% early withdrawal penalty. Designated Beneficiary (Deaths before RBD). This is the new category for deaths in 2020 and later. A designated beneficiary (only) is the same category of people and certain trusts that allow for the measurement of their life expectancies. The good news is that these individuals and trusts are not bound by the rules covered next for estates, charities, and other no designated beneficiary situations. The bad news is that only being a designated beneficiary and not an eligible designated beneficiary means always being under the 10-year rule no matter when the decedent passed away. This is usually much faster than was allowed for death prior to 2020. When the decedent passes away before their RBD, the "Simple 10-Year Rule" applies. (The term "Simple 10-Year Rule" is not a standard industry term. It was made up to contrast with the "Complicated 10-Year Rule" which is also not an industry standard term. Estate, Charity, or No Designated Beneficiary. If no beneficiary has been named by September 30th of the year following the owner's death (or beneficiary is an estate, charity, or certain trusts), the account must be fully distributed before the end of the fifth year following the year of death. The account balance may be distributed over any schedule prior to the end of the fifth year but may never extend beyond.

Disadvantages of rollovers?

The client may need the funds for current living expenses. Few retired people are able to maintain their preretirement living standard on Social Security and personal savings alone. Most need to supplement those sources with distributions from their qualified retirement plans. Thus, deferral may not be a feasible solution. The client could, however, roll over the lump sum and take small periodic distributions from the IRA as needed while allowing the remaining funds to remain tax deferred. Loss of NUA or capital gain treatment. An individual who rolls over a distribution of employer stock loses the ability to elect net unrealized appreciation (NUA or capital gain treatment) on any gain up to the amount of the NUA. Distributions from a deductible IRA are always taxed as ordinary income. Potential loss of protection from creditors. Money in a qualified plan is protected from the claims of nonbankruptcy and bankruptcy creditors under federal law. Although several states provide similar protection for IRAs, IRA assets in certain states (creditor-friendly states) are subject to the claims of nonbankruptcy creditors. However, as a practical matter, many debtors in creditor-friendly states may choose to file for bankruptcy to protect a large IRA from the claims of their creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), IRA rollover assets from a qualified plan or 403(b) arrangement are fully (100%) protected from the claims of bankruptcy creditors, as are regular IRA and Roth IRA assets of up to $1 million (adjusted for inflation every three years). The specific number is not testable, but the concept of IRAs having somewhat less bankruptcy protection than most employer retirement plans and the general amount of protection is an important one to remember.

Conduit IRA

The conduit IRA acts as a way station between qualified plans (or 403[b] accumulations). Thus, this IRA applies only to the person who expects to join a new employer and a new qualified retirement plan. Typically, such an account is used by individuals who receive a distribution from a qualified plan upon termination of employment and wish to retain the fund's qualified status, but do not expect to be reemployed within the permitted 60-day rollover period.

required beginning date (RBD)

The date by which required minimum distributions must start

What is the required deadline for the commencement of distributions from qualified plans, IRAs, SEPs, TSAs, and other retirement accounts?

The deadline for taking minimum distributions for 2023 and later is April 1st of the year following the year in which a plan participant or owner attains age 73. For a common-law participant (a participant who does not own 5% or more of the company) in a qualified plan, the required beginning date is April 1st of the year following the later of attaining age 73 or retiring from the company.

The rules to how much of a loan you can take out from qualified plan loan

The exact rules are: -If the vested balance is under $10,000, then the entire vested balance is available for a loan. -If the vested balance is between $10,000 and $20,000, then the available loan is $10,000 (which is greater than 50% until $20,000). -If the vested balance is $20,000-$100,000, then the maximum loan is half the vested balance. -The maximum retirement plan loan is usually $50,000, so having a vested balance greater than $100,000 generally does not impact the available loan balance. The exception to $50,000 being the maximum is for a qualified disaster loan. When a retirement account loan is taken due to a federally declared disaster, the $50,000 loan cap is replaced with $100,000. -The maximum available loan balance is always reduced by the highest loan balance in the previous 12 months. For example, if a person had a vested balance of $120,000, their maximum loan would be $50,000. However, if they had a retirement plan loan with the highest balance in the last 12 months of $5,000, then the maximum loan available would be $45,000.

What are the questions to be asked when determining the RMD rules for the beneficiary of an IRA or employer retirement account?

The first questions is "when did the person die relative to their required beginning date (RBD)?" The second question is "what type of beneficiary will receive the retirement assets?"

What are the three options for calculating the payment amount of substantially equal periodic payments?

The first two options, the amortization and annuitization methods, provide a fixed withdrawal amount. In the simplest terms, an individual's beginning accumulation is annuitized or amortized over their life expectancy. The payment amount is based on an interest rate that cannot be more than 120% of the federal mid-term rate. If a lower payment is desired, clients can use the joint life expectancy of themselves and their beneficiaries. Another option for a lower payment is to use the third calculation method, the RMD approach, which generally results in a lower required distribution than the other two methods. With the RMD approach, the required distribution is based on the current account balance divided by the individual's life expectancy. The annual distribution will vary based on the current accumulation. The rules permit a one-time switch to the RMD approach, while the election of the first two calculation methods are irrevocable.

When does the five-taxable-year period of participation begin for Roth contributions to a 401(k) or 403(b)?

The five-taxable-year period of participation begins on the first day of the employee's taxable year (January 1 of that calendar year) for which the employee first made Roth contributions to a 401(k) or 403(b) plan and ends when five consecutive taxable years have passed. If an employee makes Roth contributions to two or more plans, they will have two or more different five-taxable-year periods, assuming the contributions were made in different years. If a direct rollover is made from a Roth account held by one plan (transferor plan) to another plan (recipient plan), the five-taxable-year period for the employee under the recipient plan begins on the earlier of the first day of the employee's taxable year for which the employee made Roth contributions to the transferor plan or the recipient plan.

Systematic Withdrawals

The key to systematic withdrawals is to identify the withdrawal rate that will allow your client to receive a regular stream of income without running out of money before the end of their life. The optimal withdrawal rate will vary from client to client depending on a number of factors. These include the time horizon used, the asset allocation of the portfolio, and the inflation adjustments applied to the withdrawal amount each year. A client's risk tolerance can also come into play. Some are more willing to risk running out of money in exchange for being able to use a higher withdrawal rate.

Internal Revenue Code (IRC)

The legislation that defines tax liabilities and deductions for U.S. taxpayers.

What are some Payout Options?

The life annuity and joint and survivor annuity are just two of many payout options generally available. Another is the period-certain option.

What are the benefits from making QPLOs?

The lower current tax bill is on one side and a greater principal amount at retirement is on the other. While clients might find lowering their current income tax bill the most motivating factor for making QPLO rollovers, the larger benefit, especially for a younger person, is the extra principal at retirement due to compounding.

What is the default distribution option for the married participant of a defined benefit plan?

The married participant in a defined benefit plan will automatically be given a joint and survivor annuity as a distribution option. This provides a fixed life benefit for the retiring participant and a reduced benefit for their survivor. The plan participant cannot unilaterally cut the spouse out of this benefit. If another distribution option seems more appropriate, the spouse must give their written consent to the change.

What is the negative tax aspect of rolling over a lump sum distribution?

The negative aspect of the rollover (except in the case of a conduit IRA) is that it may eliminate the opportunity for forward averaging.

How can the negative aspect of the indirect rollover be avoided?

The negative withholding aspect of the indirect rollover can be avoided by using a direct rollover. In this type of rollover, no funds are withheld for taxes.

Some IRAs and qualified plans contain contributions of after-tax dollars. When distributions from these plans are made through a series of equal installments, how does one identify which part of each payment is the after-tax dollars and which is not?

The nontaxable portion of each payment is determined by dividing the total contribution of after-tax dollars—i.e., the cost basis—by the number of anticipated monthly payments.

Qualified plans and TSAs may permit participants to borrow from their accrued benefits. What is the maximum repayment period for such loans?

The plan participant may borrow for a period of no more than five years, except in the case of loans used to acquire a principal residence.

Monte Carlo Analysis

The purpose of Monte Carlo analysis is to calculate the probability of specific scenarios that are based upon a given set of assumptions and standard deviations. In other words, Monte Carlo is a computer model that runs many random iterations meant to model the different paths one's invested assets could take. Some paths reflect favorable market conditions, some project higher inflation, and some factor in a market downturn. The outcome shows the probability of meeting one's specified goal. Inputs to this model include the client's age and expected retirement date, investment mix, and their anticipated annual retirement income need. The computer model then runs hundreds or thousands of possible return sequences (iterations) using actual historical financial data. The number of iterations is meant to account for the range of possible outcomes, and the impact of volatility and return sequencing. The bottom line is that Monte Carlo, while a useful tool, should not be used without a full understanding of the caveats. Additionally, to improve its usefulness, as the retirement planner, you should rerun the simulations for your clients on an annual basis to reflect changing life expectancies, changes in savings, etc. Ideally, your client can then make needed adjustments to savings or spending rates well before they run into trouble.

Participant Dies Before RMDs Begin with Spouse Sole Eligible Designated Beneficiary, Option #3: Distribution according to 5-year rule

The surviving spouse can choose to leave assets in the original account and defer receipt of distributions until December 31 of the fifth year after the participant's death. In the fifth year, however, they must take a distribution of the entire remaining account balance. Remember that there is no 10% early withdrawal penalty for distributions due to death. One way to remember the 5-year rule is that it is the end of the year with the fifth anniversary of the person's death. Notice that this is actually six tax years (the year of the death and then the next five years).

What is the tax benefit of rolling over a lump sum distribution?

The tax benefit of a rollover is that, if properly executed, it defers taxation of the lump sum until such time as it is distributed from the IRA or other retirement plan into which it was rolled.

What does the tax code require in terms of minimum distributions (RMDs) once the plan participant has attained age 73 in 2023 and later according to SECURE 2.0?

The tax code has specific rules about how much must be distributed, or the RMD. They are: -the amounts in the plan must be taken over a period of time that does not exceed the participant's life expectancy under the Uniform Table (Table III) -the amounts in the plan must be taken over a period of time that does not exceed the joint life expectancy of the plan participant and the spouse using the Joint and Last Survivor Table if the spouse is 11 or more years younger than the participant Life expectancy is based on an IRS table. The formula for determining the RMD is: RMD= Account balance on 12/31 of the prior year/life expectancy on Uniform Table

What is the negative tax aspect of taking a lump sum distribution?

The tax implication of taking a lump sum distribution is that the entire sum must be recognized as taxable income in the year in which it is received.

What are the two alternative payment options generally available to retired and terminated participants in qualified retirement plans?

The two forms of benefit payment generally offered to plan participants are: -a lump sum distribution of the entire benefit -a series of periodic payments (an annuity or series of installments).

Nonsurviving spouse EDBs

There are four types of nonsurviving spouse EDBs: a beneficiary who is not more than 10 years younger than the decedent owner (for example, a sister who is two years older or a friend who is eight years younger); a disabled person; a chronically ill person; or the decedent's minor child (until the child reaches the state-set age of majority, at which time the 10-year rule kicks in).

What are some factors and things to consider prior to rolling over assets of employer plan to an IRA

These include an examination of fees, services offered, investment options, when penalty-free withdrawals are available, when required minimum distributions (RMD) may be required, and protection of assets from creditors.

What are some of the variables to consider related to retirement cash flow considerations?

These include future interest rates, stock prices, assumptions regarding inflation, future income needs, and the retiree's life expectancy.

What does the TCJA give to those who default on loans due to separation from service or the underlying retirement plan being terminated?

They give them more time to make adjustments to shore up their retirement. This can greatly enhance their retirement, especially when there is time for the retained principal to grow.

What is one way to remember the list of EDBs?

Think of "Mrs. T.D. McDonald." Mrs. - Surviving spouse. "Mr. T.D. McDonald" would not work because a Mr. can be married or unmarried. T - Ten years (someone not more than 10 years younger than the decedent) D - Disabled, M - Minor child (until the child reaches the age of majority) C - Chronically ill

non-eligible designated beneficiaries (NDBs)

This is a beneficiary that is not a living, breathing individual (e.g., a charity, estate, or non-qualifying trust)

Table III (Uniform Lifetime Table)

This table automatically "recalculates" the owner's life expectancy each year because it uses the attained age for that year for each year's distribution (as opposed to simply subtracting one year each year). Using this table, the mere fact that we survive another year extends our actuarial life expectancy.

Table I (Single Life Expectancy for Use by Beneficiaries)

This table is for use by beneficiaries. The beneficiary's life expectancy is determined by their attained age in the year following the year of death and is reduced by one for each subsequent year. This is sometimes referred to as the "one-year-less method" of calculating life expectancy, as opposed to the "recalculated" method. The "one-year-less" method produces faster RMDs because the actual statistical life expectancy does decrease by a full year at a time.

Table II (Joint Life and Last Survivor Expectancy)

This table is used if the sole beneficiary of the IRA is a spouse more than 10 years younger than the IRA owner.

Eligible designated beneficiary

Under the SECURE Act, certain types of beneficiaries do have the ability to stretch an employer retirement account or IRA (at least partly based on their ages) for longer than the 10-year rule. These people are categorized as eligible designated beneficiaries (EDB). It is helpful to split this category into two types of EDBs: surviving spouses and people who are not surviving spouses. Essentially, the SECURE Act did not change the rules for these people.

Participant Dies Before RMDs Begin with Subsequent Beneficiary (Remainder Beneficiary)

Upon inheriting an IRA, subsequent beneficiaries can be named. If the beneficiary dies before the assets are fully distributed, the subsequent beneficiary may take a lump sum distribution of the remaining assets or the distribution must be taken under the 10-year rule. For example, assume an eligible designated beneficiary is taking RMDs over their life expectancy of 34 years but passes away after 12 years. The subsequent beneficiary can take distributions over the 10-year rule. This is another major change under the SECURE Act.

4% Rule

Using historical data and a 50/50 stock/bond allocation, Bengen argued that if the initial withdrawal rate is set at 4% of savings, and the dollar amount of subsequent withdrawals increases with inflation, just about all well-constructed portfolios will be able to last throughout retirement (for at least for 30 years). Of course, in his studies Bengen identified years where a client could have spent 6%-7% of their portfolio. Looking at the worst-case scenario, however, the safe withdrawal rate was found to be 4%. This "rule of thumb" caught on because it provided retirees with a fixed rate of withdrawal (like an annuity), it was easy to calculate and follow, and it minimized the risk of running out of money. One of the problems with a 4% initial withdrawal rate is that it doesn't represent a lot of income for most people. Many analysts, however, place the safe withdrawal rate at closer to 3%-3.5%, citing longevity projections, predictions of lower-than-historical stock market returns, and the current low interest rate environment.

What is something to remember about a QDRO?

When a QDRO is involved, be sure to think in after-tax dollars. When money is received from a retirement plan, the alternate payee will need to pay income tax at their marginal tax rate whenever they take a distribution. Distributions directly from the retirement plan will not be subject to a 10% early distribution penalty. If, however, the alternate payee rolls their awarded accumulation to an IRA, they would then be subject to a 10% early distribution penalty on pre-age 59½ withdrawals. Occasionally, divorcing couples attempt to minimize the expense of the divorce by resorting to "do-it-yourself" approaches for splitting their retirement assets. This may turn out to be "penny-wise and pound-foolish." In one such case, a participant in a qualified plan, Mario Rodini, received a lump sum distribution from the plan and transferred the distribution to an IRA established in his soon-to-be former wife's name (a kind of do-it-yourself QDRO). Both Mario and his wife were surprised when the IRS ruled the distribution was fully includible as income to Mario and subject to early withdrawal penalties. Mario and his wife were then each assessed a penalty on the IRA established with nonqualified money. The reason: The transaction was not authorized by a valid domestic divorce decree. (Mario Rodini, et al v. Commissioner of Internal Revenue, U.S. Tax Court, No. 28636-92, July 24, 1995.)

How are Roth IRA distributions from multiple accounts distributed?

When a client wishes to take a distribution from multiple Roth IRAs, the assets in the Roth IRA are pooled. The funds in each account, however, are categorized and considered to be withdrawn in the following order: contributions, conversions (starting with the oldest conversion and then moving forward in time), and finally earnings. That is, once all annual contributions have been distributed from all Roth IRA accounts, conversions are accounted for as coming next. Once all conversions are withdrawn, earnings start to be withdrawn.

Participant Dies After RMDs Begin

When death occurs on or after the required beginning date (i.e., the death was on or after April 1st of the year following the year the owner turned 73 or a less than 5% owner actually retires), the participant's required distribution for the year of death must be made.

Simple 10-Year Rule

When the decedent passes away before their RBD, the "Simple 10-Year Rule" applies. (The term "Simple 10-Year Rule" is not a standard industry term. It was made up to contrast with the "Complicated 10-Year Rule" which is also not an industry standard term. The Simple 10-year Rule could also be called the "Simple and Dangerous 10-Year Rule. It is simple because the only rule is that the account must be emptied by the close of business on December 31 of the year containing the 10th anniversary of the death. It is dangerous because many people will miss this RMD because they never had any RMDs until the 10th year. This is like a college class in which the entire grade is based on the final exam.

Participant Dies Before RMDs Begin with Multiple Beneficiaries

Where there are multiple beneficiaries of an IRA, retirement plan, etc., the rule that requires distributions to be made based on the life expectancy of the oldest eligible beneficiary doesn't apply if an IRA provides a separate account for each beneficiary or if the beneficiaries are given fractional or percentage interests in the retirement arrangement and separate accounts are established no later than December 31 of the year following the year of the retirement plan owner's death. Separate accounts can be established by dividing an inherited IRA into separate IRAs for each beneficiary. Distributions must be made to the eligible designated beneficiary of a separate account based on such person's life expectancy determined by the age attained on their birthday in the year following the year of the participant's death. If there are designated beneficiaries that are not eligible designated beneficiaries, they must take distributions under the 10-year rule as described below for designated beneficiaries.

Participant Dies Before RMDs Begin with Spouse Sole Eligible Designated Beneficiary, Option #1: Roll inherited assets into their own IRA (treat as your own)

With this option, assets are transferred into the spouse beneficiary's own existing or new IRA. RMDs would begin at the surviving spouse's own age 73 and would be based on their own life expectancy under the Uniform Life Expectancy table (Table III). Moving the deceased spouse's retirement account into the surviving spouse's retirement account can be thought of as treating this money as if the deceased spouse never existed. For later distributions, this money is treated exactly the same as money contributed by the surviving spouse. This is a major disadvantage if the surviving spouse is under 59½. -This option is available only if the surviving spouse is the sole eligible designated beneficiary. -IRA assets can continue growing tax deferred. -If the surviving spouse is under 59½, they will be subject to the same distribution rules as if the IRA had been theirs originally, so distributions cannot be taken without paying the 10% early withdrawal penalty unless one of the IRS penalty exceptions is met. -The surviving spouse may designate their own IRA beneficiary.

qualified domestic relations order (QDRO)

a legal judgment mandating the distribution, segregation, or attachment of one person's property (the participant) for the benefit of another (the alternate payee). QDROs are a fairly regular feature of divorce settlements that involve spousal interests in private pension and benefit plans, such as 401(k) qualified retirement plans. Here, the court orders the distribution or attachment of a plan participant's interest in a retirement plan in favor of an ex-spouse, a child, or another dependent who is recognized by the court order as having rights to a participant's qualified plan benefits. A QDRO must be presented to the plan administrator, who must confirm the QDRO as a qualified or valid order. Note: QDRO requirements apply to qualified plans, 403(b) plans, and Section 457 arrangements, but do not apply to IRAs or plans utilizing IRAs, e.g., SEPs or SIMPLE IRAs. Plans using an IRA may be awarded to an ex-spouse according to the terms of a divorce decree. Some retirement plans allow the alternate payee to immediately withdraw accumulations awarded through a QDRO. Other plans will not make the funds available until after the employee participant actually retires, or at least attains the earliest retirement age allowed by the plan (in some cases as early as age 50 or 55).

Deemed distribution

a plan loan fails to meet the five-year term requirement a loan that did not involve purchasing, repairing, or remodeling the principal residence was mistakenly made for seven years, the entire initial loan balance would be treated as taxable income on day one. On the other hand, if a retirement plan loan fails to meet the dollar limit, the amount in excess of the dollar limit is a deemed distribution.

Employer Roth account

an employer-sponsored retirement savings account that is funded using after-tax dollars. This means that income tax is paid immediately on the earnings that the employee deducts from each paycheck and deposits into the account. Withdrawals from the account are tax-free upon retirement.

What is the noncommingling rule?

as long as the funds originated from a qualified plan or 403(b) plan. If other assets are commingled with the assets in the conduit IRA, the IRA will lose its conduit state and the assets will no longer be considered "qualified," and will not be allowed to be moved to another employer-sponsored retirement plan as qualified assets in the future. Conduit IRAs cannot accept regular IRA contributions.

What are the three forms that come from retirement leakage?

cash-outs, hardship withdrawals, and loan defaults.

What is the date that you must start a required minimum distribution?

date is April 1 of the year following the year in which the participant attains age 73 for 2023 and following according to SECURE 2.0 or the year in which the participant retires (if not a 5% or more owner)

Eligible Designated Beneficiaries (EDB)

defined as a spouse, a minor child of the deceased, a disabled person, a chronically ill individual, or an individual not more than ten years younger than the retirement account owner or participant.

The "floor-and-upside" strategy

focused on safety over growth potential. It locks in a secure stream of retirement income before investing any remaining retirement assets in a riskier portfolio. A so-called "income floor" is a level of income below which an individual will not fall. It is a fixed amount that is typically enough to cover one's fixed expenses. To create this floor, a retiree could devote a portion of their retirement savings to a life annuity in exchange for the guarantee of a certain amount of income for as long as they live. Investing in a bond ladder is another way of establishing an income floor. To do this, you would identify specific bonds that will mature at the appropriate time to meet a client's cash flow needs. Zero coupon bonds are widely used for this purpose as they do not pay regular interest payments, but mature with a designated amount of income at maturity. Most flooring strategies are done with U.S. government bonds in order to avoid the default risk inherent in corporate bonds. Care should also be taken in using municipal bonds. Despite their tax advantages, they too carry default risk. Social Security and pensions also provide secure lifetime sources of income, or income floors.

What are the main sources of variability in retirement planning assumptions?

inflation investment return longevity

Sequence of returns risk

involves the order in which investment returns occur. Sequence of returns risk can greatly impact the retiree's ability to attain short-term and long-term goals, and has been an area of great interest to the investment community.

When does the five-year clock start for a Roth IRA contribution?

it begins with the individual's initial contribution to a Roth IRA

Life annuities (distribution strategy)

most favored by economists, particularly for retirees who aren't concerned with leaving a bequest. Ironically, this is the least favorite strategy among consumers looking to fund their retirement, despite the fact that an annuity provides the greatest longevity insurance of the strategies we have covered. A life annuity is a contract with an insurance company to provide a set amount of income (monthly or annual) for life in exchange for either a single large payment or a series of smaller payments over time. The loss of control over their principal investment is what concerns most investors. For many, this outweighs the benefits associated with receiving a lifetime income. A solution to much of this resistance is to position annuities as insurance products, not investments. The value they create is not just the income they generate, but the assurance that they provide a lifetime income.

Period Certain Option

provides regular monthly payments over a specified period, even if the recipient (and spouse) happens to die during the specified period. This ensures payments to a named beneficiary.

Double taxation

refers to the imposition of taxes on the same income, assets or financial transaction at two different points of time. Double taxation can be economic, which refers to the taxing of shareholder dividends after taxation as corporate earnings. Double taxation can be avoided if the plan participant has kept track of their cost basis—i.e., after-tax contributions—to the plan. The nontaxable portion of each distribution payment is determined by dividing the cost basis by the number of anticipated monthly payments, according to the following schedule for single annuitants.

What are the four basic strategies for turning assets into income?

systematic withdrawal strategies, "bucket" strategies, floor-and-upside strategies, and the use of life annuities.

Income in Respect of a Decedent (IRD)

taxable income to which the deceased person was entitled, but failed to receive before their death. Income received by a beneficiary that was due the decedent but wasn't paid to the decedent before death. Examples of IRD include retirement plan assets, IRA distributions, unpaid interest and dividends, salary, and commissions, to name a few. Such payments do not receive the so-called "step up" in basis to date-of-death fair market value. Thus, the beneficiary or estate that receives the distribution is responsible for income tax at ordinary income tax rates. The estate must also claim the income, but may claim a deduction in the amount of income tax due on the IRD.

What is unique to a Roth IRA?

the ability to accept converted funds. IRA, SEP, or SIMPLE IRA (after the two-year wait), qualified plan, 403(b), or 457 governmental plan benefits may be converted to a Roth IRA with no income restrictions.

Rising equity glidepath

the asset allocation path that results from spending down fixed income assets in the early years and letting equity exposure rise over time. To be more specific, Kitces and Pfau found that portfolios starting with as little as 20% in stocks and increasing to 60% had a better, albeit modest, chance of lasting 30 years than portfolios that began high in stocks and gradually decreased. This strategy of increasing equity exposure throughout retirement can even result in less equity exposure over one's lifetime due to the reduced exposure in the early years. Perhaps just as importantly, this reduced exposure in the early years can help ease the transition to retirement when sequence of return risk and uncertainty about the future is the greatest. By employing a rising equity glidepath, in the event of a bear market, you are essentially systematically dollar cost averaging into the market when prices are favorable (cheap). In the event that the market is rising, you have the option of changing your strategy by increasing spending or reducing your equity exposure; either way you are in good shape.

What are the three different types of rollovers?

the conduit IRA, the direct rollover, and the indirect rollover.

What if payments for a qualified plan loan are not paid on a timely basis?

the loan will usually be treated as a default and the entire balance outstanding will become a deemed distribution. Loans treated as a distribution will be treated as any other distribution from a qualified plan, and will be subject to ordinary income tax and potentially a 10% early withdrawal penalty. In these situations, clients will probably focus on the immediate tax implications. However, as bad as the current income tax situation may be, the loss of the principal compounding until retirement is probably even worse.

longevity risk

the risk that life expectancy will exceed expectations, resulting in retirement income needs that are greater than anticipated. To put it more simply, it is the risk of running out of money, resulting in a lower standard of living, a reduced level of care, or, in many cases, even the need for postretirement employment. This risk is coming to the forefront as the population rapidly ages and life expectancy increases. In fact, the risk of outliving one's assets is widely considered to be the number one concern of retirees today.

Bucket Strategies

this strategy is meant to mitigate the sequence of returns risk by creating a bucket of cash or money market instruments for immediate cash flow needs while also maintaining a diversified portfolio of more volatile assets with higher potential returns for future needs. It recognizes that clients face different risks as they move through retirement.

What is a way to remember the qualified purposes for employer Roth accounts?

"DAD" D - Death A - Age - Age 59 ½. D - Disability

My disastrously faulty emergency fund

"My" for Medical and funeral expenses (unreimbursed). "Disastrously" for federally declared Disasters. "Faulty" for "First home buying" in the sense of purchasing a primary residence. This is NOT the same definition as a first-time home buyer for exceptions to the 10% early withdrawal penalty for IRAs. Also hardship withdrawals can only be used for a primary/first residence—never a second home. "Emergency" for Education (higher education) expenses. These higher education expenses can be for the employee, the spouse, the employee's children, the employee's dependents, or a beneficiary. The qualified educational expenses include tuition and related educational fees plus room and board. These educational expenses must occur within 12 months of the distribution. "Fund" for Foreclosure of the primary home. Foreclosures on a second/vacation home do not count. Hardship withdrawals can be thought of as "My disastrously faulty emergency fund" because they should not be thought of as the emergency fund at all. However, hardship withdrawals are often used when a true emergency fund had not been established. Hardship withdrawals are not a proper emergency fund because they are taxed and penalized. Worst still, the principal and the forgone earnings will not be available for retirement.

Advantages of rollovers?

-Continued tax deferral. By deferring tax recognition, the entire lump sum has an opportunity to be invested and accumulate more earnings. In most scenarios, clients benefit from additional tax deferral. Obviously, this would not be true if the client's tax bracket at the time of the lump sum distribution is lower than their future tax bracket. -Flexibility. Up to April 1 of the year following the attainment of age 73, the age at which the government requires minimum distributions, the client has the flexibility to take as much or as little from the IRA as desired. This flexibility may be particularly useful in tax planning and personal budgeting. -Expanded investment options with potentially lower fees. -Ability to consolidate accumulations from various plans. -Simplified computation and ability to consolidate required minimum distributions.

What doesn't the 10% penalty apply to for distributions from employer-qualified plans, 403(b) TSAs, IRAs, SIMPLE IRAs, and SEPs?

-Due to the death of the plan participant -Due to permanent disability -Due to separation from service after age 55 -Part of a series of substantially equal periodic payments made over the participant's life expectancy or the joint life expectancy of the participant and their beneficiary. -Related to certain medical expenses not reimbursed by insurance. -Related to certain medical expenses not reimbursed by insurance. -Related to a qualified domestic relations order (QDRO). -Employer stock option plan (ESOP) dividends -Taken to correct previous excess contributions or deferrals -Certain distributions to qualified military reservists called to active duty -Distributions due to an IRS levy -Disaster withdrawals up to $22,000 in 2021 or later. -SECURE 2.0 added a new exception to the 10% early withdrawal penalty from employer plans and IRAs for people who are terminally ill. -SECURE 2.0 extends this to public safety officers at any age with at least 25 years of service. It also adds state and local corrections officers. Finally, private-sector firefighters who are age 50 or older when separating from service also get an exception to the 10% EWP. -2024: Domestic abuse survivors may start withdrawing the lesser of $10,000 (indexed) or 50% of the vested retirement account without the 10% EWP. -2026: Up to the lesser of $2,500/year or 10% of the vested balance may be withdrawn to pay the premiums for "high quality" long-term care insurance

What is the planning opportunity that the timing of a plan loan default provides?

-If a default due to separation from service can be delayed from late December to early January of the next year, an individual is granted substantially more time to fund a QPLO rollover and thus reduce retirement leakage. For example, if a default can be moved from December into January, the individual would gain an extra 12 months to make QPLO rollovers. On the other hand, a default due to separation from service that happens more than 365 days (one year) after the date of separation is not a QPLO. In this case, the default would be treated as a "plan loan offset" (note that absence of the word "qualified"). This offset of the loan due to separation from service is still an eligible rollover distribution, but the time frame is shortened to the normal 60 days for a rollover. However, in this situation, the person would have made an extra year's worth of retirement loan payments and thus reduced the taxable amount. -The timing of terminating a retirement plan can give plan participants more time to make QPLOs and thereby decrease the impact on workers. Thus, an employer considering terminating their 401(k) in November of this year should consider terminating the plan in January of next year. Delaying the termination date until the workers' retirement loans would default in the next year would allow workers more time to get money into their IRAs and soften the blow from the plan termination.

How are the distributed shares handled for tax purposes?

-The employee-recipient is immediately taxed on the cost, or basis, of the securities received, and at ordinary income rates. In our example, John would have to include $50,000 in his ordinary income this year (i.e., the year in which he took the distribution). -The NUA is not taxed until the recipient actually sells the shares. When these shares are sold, however, the NUA is taxed as a long-term capital gain, regardless of how long the securities were actually held by the recipient. -Any gain realized in excess of the amount of the NUA is treated as either short-term or long-term gain, depending upon how long the securities were held by the recipient after their distribution from the plan. -The NUA portion of the shares will not receive a stepped-up basis when John dies. For example, if John died before selling any of the shares and the shares were worth $600,000 when he died, his heirs would receive the shares with a basis of $400,000. This is the $600,000 value when he died minus the $200,000 NUA amount. A second way to determine the post-death basis would be to start with the original $50,000 basis, then grant a step-up for the appreciation after the initial distribution from the stock bonus plan. The account rose from $250,000 to $600,000. This is a $350,000 appreciation since the stock was distributed. Thus, the new basis is $400,000 ($50,000 + $350,000).

What is the first-in, first-out order?

-annual contributions -the "included as income" portion of the first or earliest conversion, then the "included as income" portion of the next conversion, etc. -earnings

What distributions are not eligible rollover distributions?

-corrective distributions of elective deferrals contributed to a Roth plan account that exceed the Section 415 limits (lesser of $66,000 or 100% of earnings for 2023) -corrective distributions of excess deferrals that exceed the Section 402(g) limit ($22,500 in 2023, $30,000 if 50 or older) -corrective distributions of excess contributions -deemed distributions to a participant on account of a plan loan default

What distributions are not eligible for a rollover?

-distributions that are part of a series of substantially equal periodic payments for the life of the participant or the joint lives of the participant and the participant's designated beneficiary; for example, the client receiving annuity payments of $3,000 per month for life cannot roll over part or all of that monthly distribution into an IRA to avoid paying taxes on it -distributions for a specified period of 10 years or more distributions that are made to comply with the minimum distribution requirements-tax regulations mandate minimum distributions from qualified plans beginning after age 73 or retirement, whichever occurs last -corrective distributions of excess contributions and excess deferrals from 401(k) plans and the income allocable to these distributions -plan loans treated as deemed distributions, including plan loans that are in default (there is a special rule that allows deemed distributions due to separation from service with an outstanding loan to be rolled over) -dividends on employer securities held by the plan that are distributed in cash to participants -the taxable cost of life insurance ("P.S. 58" or Table 2001 costs) held by the plan -the nontaxable portion of any distribution; some distributions contain previously taxed monies that cannot be rolled over -hardship distributions -IRAs inherited by someone other than a surviving spouse (cannot be retitled in the beneficiary's name) -retirement plan distributions that are not rolled over within 60 days following receipt of the assets

What are some exceptions that apply to IRAs only for the 10% penalty?

-due to the death of an IRA owner (such as distributions that are paid to the deceased owner's estate or beneficiary) -due to permanent disability. -that are part of a series of substantially equal periodic payments made over the owner's life expectancy or the joint life expectancy of the owner and the beneficiary of the IRA -to the extent that they are used to pay unreimbursed medical expenses exceeding 7.5% (2020) of the individual's adjusted gross income -to the extent that withdrawals do not exceed the amount paid for medical insurance premiums (for the IRA owner and their spouse and dependents) following the loss of employment. -when the funds are used by a first-time homebuyer. Distributions up to $10,000 taken for qualified first-time homebuyer expenses are not subject to the 10% penalty. -when the funds are withdrawn from a regular IRA to pay qualifying education expenses (tuition, fees, books, supplies, and equipment) required for enrollment or attendance at postsecondary education institutions, including graduate-level courses (there is no upper limit on these withdrawals). -to a spouse or former spouse under the terms of a divorce decree or divorce settlement. -certain distributions to qualified military reservists called to active duty -qualified disaster distributions up to a $100,000 cumulative lifetime limit -The withdrawal of earnings from excess IRA contributions is now explicitly exempt from the 10% EWP if the excess contribution and the earnings on the excess contribution are withdrawn by the due date of the client's tax return for that year (including extensions) as long as the client did not claim a deduction for the excess contribution.

Distributions from Roth IRAs may be exempt from the 10% early withdrawal penalty if?

-made to a beneficiary on account of account owner's death -made on account of disability -made as part of a series of substantially equal periodic payments -to cover unreimbursed medical expenses that exceed 7.5% of AGI -to pay medical insurance premiums after a job loss -not exceeding the individual's qualified higher education expenses -due to an IRS levy of the qualified plan -a qualified reservist distribution -a qualified recovery assistance distribution

What are the rules to determine how much must be distributed each year for a required minimum distribution?

-the amounts in the plan must be taken over a period of time that does not exceed the participant's life expectancy as determined by Table III, which is also called the Uniform Table; or -if the participant's sole beneficiary is their spouse and the spouse is more than 10 years younger than the participant, the amounts in the plan must be taken over a period of time that does not exceed the joint life expectancy of the plan participant and the participant's spouse as determined by Table II; or -if death occurred before the required beginning date and there is no designated beneficiary and if the plan document does not specify the allowable elections, the amounts in the plan must be distributed by the end of the year containing the fifth anniversary of the participant's death (the five-year rule). This rule was not changed by the SECURE Act.

Disadvantages of an indirect rollover?

-the opportunity to roll the funds into a new employer's qualified plan is eliminated -20% of the gross amount of the distribution will be withheld for taxes

What are the three ways to convert benefits of an IRA into a Roth IRA?

1. 60-day rollover: The individual accepts payment and redeposits the distributed assets within 60 days. 2. Trustee-to-trustee transfer 3. Same trustee transfer: The money stays within the same institution. The individual simply sets up a Roth IRA account with the trustee holding the traditional IRA, and then directs them to move the money to the Roth IRA.

What is the recommended order to accessing retirement assets?

1. First, taxable accounts (taxable savings accounts). Although the individual will need to sell investments and pay capital gains tax on any appreciation, if they held the investment for longer than a year, they will be taxed at long-term capital gains rates, which are significantly less than ordinary income tax rates. Also, using their taxable assets first allows their tax-advantaged accounts to continue growing tax deferred. 2. Next, they should withdraw from tax-deferred accounts (IRA, annuity, qualified retirement plan). 3. Finally, they should withdraw from tax-exempt retirement accounts, such as a Roth IRA or Roth 401(k). Qualified withdrawals from Roth accounts won't be taxed, which makes them valuable later in retirement. Additionally, Roth accounts can be useful in estate planning because beneficiaries won't owe income tax on distributions. This order of distribution is thought to be best as it taps the least tax-favored assets first while retaining the benefits of tax deferral for as long as possible.

Qualified plan- Loans

1. The term of the loan must not exceed five years, except if for the purchase of a primary residence, which may be for a longer period. Although there is no legal restriction on how long a retirement plan loan can be when buying a home, many plans choose to limit the repayment to 10 years. 2. Loans must be available to all participants and beneficiaries on a nondiscriminatory basis. Hence, loans must not be available to highly compensated employees in greater proportions (as a percentage of account balance) than to nonhighly compensated employees. 3. Loan repayments must be made at least quarterly on a substantially level amortization basis. Hence, "balloon payments" are not allowed. Repayments are generally made through payroll, and if not repaid by termination of employment the loan may be considered a taxable distribution. 4. The loan must be evidenced by a legally enforceable loan agreement or note specifying the amount of the loan, the term, and the repayment schedule. 5. The amount of the loan typically may not exceed the lesser of $50,000 or one-half of the vested balance. 6. A plan that offers loans must have a written loan policy in effect so that loans are made in accordance with plan provisions, and the loan policy. When a loan is taken, securities are sold and funds are actually removed from the participant's account. The amount repaid includes a "commercially reasonable interest rate"—typically prime. Interest payable on a loan is considered a personal expense of the borrower and is not deductible for income tax purposes. 7. The SECURE Act bans retirement plan loans from being offered using credit cards or similar arrangements.

What are the two key principles for achieving the maximum tax efficiency?

1. Withdraw funds from taxable accounts before the 401(k) or Roth IRA because the taxable account is the least tax efficient. 2. Withdraw funds from the 401(k) whenever those funds would be taxed at an unusually low tax rate for that retiree.

What are the two ways to convert benefits of a qualified plan, 403(b), or 457 governmental plan benefits into a Roth IRA?

1. accept payment and redeposit the distributed assets within 60 days into a Roth IRA 2. request a direct transfer of an eligible rollover distribution (direct rollover transfer) to a Roth IRA

Hardship Withdrawals

A 401(k) plan participant who demonstrates (1) "an immediate and heavy financial need" and (2) lack of other "reasonably available" resources may qualify for a hardship withdrawal. IRS regulations provide the following examples of need that would be considered immediate and heavy: -medical expenses for a parent, spouse, child, dependent, or any primary beneficiary (defined below) -purchase of a primary residence -tuition payments for a parent, spouse, child, dependent, or any primary beneficiary -payments to prevent eviction from one's primary residence -funeral expenses for a parent, spouse, child, dependent, or any primary beneficiary -repairs to principal residence that would qualify for a casualty loss income tax deduction

Qualified Optional Survivor Annuity (QOSA)

A QOSA is an annuity for the life of the participant with a survivor annuity for the life of the spouse, which is equal to either: -75%, if the survivor portion of the annuity provided under the QJSA is less than 75% -50%, if the survivor portion of the annuity provided under the QJSA is 75% or more Married participants in a pension plan must be permitted to elect payment of their benefits in the form of a QOSA. This election requires a participant and their spouse to waive the right to a QJSA in favor of a QOSA.

Direct rollover

A direct rollover is an eligible rollover distribution paid directly to an eligible retirement plan for the benefit of the distributee (i.e., the distribution is made in the form of a direct transfer from a retirement plan to an IRA or other eligible retirement plan). The direct rollover ensures that tax deferral is effected on the entire rollover account. The account owner (retired or terminated employee) can still withdraw funds as needed, paying tax (and early withdrawal penalty, if applicable) on the periodic withdrawals from the direct rollover IRA and avoiding the automatic 20% withholding on the original qualified plan distribution.

What is the mandatory 20% withholding that happens with an indirect rollover?

A mandatory 20% withholding is imposed on a qualified plan or TSA distribution (if the distribution is eligible for rollover treatment) if the plan issues a distribution check to the participant. Thus, the amount of the distribution check will be 80% of the participant's qualified plan account balance. The participant may simply roll over the 80% amount; however, the withheld 20% will be considered a taxable distribution, as it was not part of the rollover. The tax liability on this 20% distribution can be avoided if the participant deposits an equal amount into the rollover account.

How is a nonqualified distribution from a Roth 401(k) or 403(b) account included in the distributee's gross income?

A nonqualified distribution from a Roth 401(k) or 403(b) account is included in the distributee's gross income to the extent allocable to income (or earnings) and excluded from gross income to the extent allocable to after-tax contributions (basis). (The special ordering rules for nonqualified distributions from Roth IRAs do not apply to Roth 401(k) or 403(b) distributions; therefore, such distributions are taxed according to the separate contract rules of Section 72, which are very briefly discussed here.) The amount of a distribution allocated to basis (investment in the contract) is determined by multiplying the distribution by the ratio of the basis to the designated Roth account balance. In other words, distributions are made on a pro rata basis. For example, if a nonqualified distribution of $5,000 is made from an employee's Roth account when the account consists of $9,400 of Roth contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in the employee's gross income) and $300 of earnings (that are includible in the employee's gross income): [$5,000 × ($9,400 ÷ $10,000) = $4,700]. The rules governing withdrawals of pretax elective contributions by active participants also apply to Roth 401(k) and 403(b) contributions. So, if a plan permits distributions from a 401(k) or 403(b) account because of hardship, a participant may choose to receive a hardship distribution from their Roth account. But such a distribution will consist of a pro rata share of earnings and basis and the earnings will be included in gross income unless it is part of a qualified distribution (i.e., the distribution is made after a five-taxable-year period and they are either disabled or over age 59½).

Participant Dies Before RMDs Begin with Nonspouse Eligible Designated Beneficiary, Option #1: Rollover to decedent or inherited IRA following the death of the original participant

A nonspousal eligible designated beneficiary cannot take advantage of the spousal rollover privilege. Nonspouse eligible designated beneficiaries must directly move the inherited assets to an inherited IRA for their benefit and use their own age according to the IRS Single Life Expectancy Table to calculate the first year RMD. This first payment must be made by December 31 of the year following year of original owner's death. For each year after, they would subtract one year from the initial life expectancy factor (life expectancy is not recalculated). Remember: -Additional contributions cannot be made into an inherited IRA, but funds in an inherited IRA may be transferred into a new inherited IRA as long as the newly established IRA is opened in the name of the decedent for benefit of the eligible designated beneficiary and the IRA trustee consents. Also, this money cannot be moved by a 60-day rollover. The money must be moved using a check made out to the new custodian. Why? Because the former custodian is certifying that this is indeed inherited money. Without this safeguard, anyone could present a check to the new IRA custodian and claim it was inherited money. If this would be allowed, the person could then withdraw the money without playing the 10% EWP. -No 10% early withdrawal penalty applies to distributions prior to age 59½. -The beneficiary can name their own IRA beneficiary.

Net Unrealized Appreciation (NUA)

A special taxation treatment for a lump-sum distribution from a qualified plan that treats part of the distribution as capital gain.

Surviving spouse EDB

A surviving spouse is a separate category of EDB. Only the surviving spouse has the option to move the decedent's retirement account into a retirement account owned by the surviving spouse.

Single Premium Immediate Annuity (SPIA)

A variation on the bucket strategy is the purchase of a single premium immediate annuity (SPIA) to fund essential expenses for a lifetime. SPIAs create an immediate income stream from a single lump sum investment. The amount of the payment is determined by the interest rate in effect at the time the contract is issued and by the payment option selected (e.g., life only, joint life, period certain, etc.). The purchase of a lifetime annuity eliminates the need to manage the investment of those funds, determining which assets should be used to fund distributions, and the fear of outliving one's assets. Knowing that fixed expenses are covered frees up remaining savings, which can then be used to fund discretionary expenses. In fact, much research points to the partial annuitization of a portfolio improving its sustainability.

Employer stock option plan (ESOP)

An ESOP is a profit sharing defined contribution plan that puts employer shares in the accounts of plan participants. When these shares pay dividends, participants can take the dividends out without incurring an early distribution penalty.

in-service withdrawal

An in-service withdrawal occurs when an employee takes a distribution from a qualified, employer-sponsored retirement plan,

Participant Dies Before RMDs Begin with Spouse Sole Eligible Designated Beneficiary, Option #2: Transfer assets to decedent or inherited IRA

An inherited IRA is labeled with the name and date of death of the original owner. For example, "Thomas B. Harris III (deceased July 28, 2023) FBO Susan A. Harris." ("FBO" means "for benefit of.") Here the assets are transferred into an inherited IRA held in the surviving spouse's name. Distributions must begin no later than December 31 of the year the original account holder would have reached 73 for 2023 and following. Remember: -Annual distributions are based on spouse's life expectancy using the IRS Single Life Expectancy Table (Table I). Use spouse's current age each year. -RMDs are mandatory once the decedent would have been 73, and the individual is taxed on each distribution. -The 10% early withdrawal penalty (EWP) will never be incurred because all distributions at any time are coded as distributions due to a death because they are coming from an inherited account. -Undistributed assets can continue growing tax deferred. -The surviving spouse may designate their own IRA beneficiary. This is a very favorable category when the decedent passed away prior to their RBD and the surviving spouse has many years until age 59½, because it eliminates the 10% EWP but only requires an RMD when the decedent (not the surviving spouse) would have been 73 in 2020 and later. On the other hand, if the decedent was many years older than the surviving spouse, it would require an RMD well before the surviving spouse's own RBD. Also, a young surviving spouse can start with an inherited account and then transfer the money into their own name when they are 59½ or older.

What should you consider before doing a rollover?

Before making any rollover decision, ask if the client is required to take a distribution. If the answer is no, find out how plan assets are currently managed and determine whether a better risk/return situation (including consideration of expenses) is feasible through an IRA rollover. In some cases, the client is well served by simply staying put.

Beneficiary

Being a beneficiary allows the person or entity to receive the retirement asset after the death. However, if a person or entity is only a beneficiary, the RMD rules are generally the most severe. Also, the rules for a situation without a "designated beneficiary" were not changed under the SECURE Act; they remain the same as before 2020.

How are benefits distributed from a qualified plan or IRA taxed?

Benefits distributed from a qualified plan or IRA are taxable to whatever individual or entity is designated as the distributee. These payments are categorized as income in respect of a decedent (IRD)

Who is responsible for taxes on distributions made after the death of the plan participant?

Benefits distributed from a qualified plan or IRA are taxable to whatever individual or entity is designated as the distributee. Thus, the beneficiary or estate that receives the distribution is responsible for whatever tax is due. The payments are taxed as "income in respect of a decedent."

How are converted funds taxed?

Converted funds are subject to ordinary income tax at the time of conversion (except to the extent they represent a return of after-tax contributions) but are not subject to the 10% early withdrawal penalty.

In-Service Withdrawals- Pension Plans

Defined benefit, cash balance, money purchase, or target plans generally can make distributions only upon death, disability, separation from service, or after the attainment of age 62. (Separation from service includes retirement of the participant.) Defined benefit plans are not likely to allow in-service withdrawals due to the complex recordkeeping required. Typically, money purchase or target plans include provisions for in-service withdrawals after the plan's normal retirement age. This creates an option for the employee who elects to continue working past the plan's retirement age but who would like to begin tapping their retirement benefits.

Describe the purpose of a qualified preretirement survivor annuity (QPSA) and how it differs from a qualified joint survivor annuity (QJSA).

Defined benefit, money purchase, cash balance and target benefit plans must provide a QPSA to the spouse of a plan participant who dies prior to retirement. The payment to the surviving spouse is equal to at least one-half of the participant's actuarially reduced pension benefit as of the date of death or the earliest retirement date from the plan. A QJSA is mandated in defined benefit plans and continues payments to the surviving spouse of the plan participant who has died after leaving service. The surviving spouse does have the option to waive the benefit.

Some qualified plans provide for in-service withdrawals by plan participants. Which plans typically include provisions for withdrawals by plan participants who elect to continue working past the plan's normal retirement age?

Defined contribution plans typically allow withdrawals by participants who continue to work past the plan's normal retirement age. Theoretically, defined benefit plans can do the same, but the record-keeping complexity resulting from these withdrawals discourages most from doing so.

What is the main thing to remember about conduit IRAs?

Don't intermingle funds in conduit IRAs with other assets or with new contributions. For example, don't roll over lump sum distributions from a qualified plan to an IRA to which a client has been making other contributions; doing so will undermine the client's ability to ultimately roll the funds to a new qualified plan. A client should have a separate IRA set up as a conduit for their qualified plan assets. If they want to make IRA contributions based on other earnings, a second IRA should be set up for that purpose.

What are the three types of beneficiaries for deaths in 2020 and later under ERISA?

Eligible designated beneficiary, designated beneficiary, and beneficiary

What are steps to avoid being hit with the 10% early withdrawal penalty?

First, make sure your client has an adequate emergency fund outside of their qualified plans and IRAs. Second, focus on creating a diversified portfolio, one with products that are subject to different tax rules upon distribution. For example, if a client has a Roth IRA, they could withdraw their contributions at any time, tax- and penalty-free.

What are the two requirements for a Roth IRA distribution to be qualified?

First, the owner must have established a Roth IRA at least five years prior to the distribution. Second, if this five-year holding period has been met, a distribution is considered qualified if it is made under any of the following circumstances: -on or after the date the owner attains age 59½ -to a beneficiary or after the death of the owner -to the owner because of the owner's disability -for first-time homebuyer expenses of up to $10,000 (A first-time homebuyer is one who has not held an ownership interest in a residence for the previous two years.)

What are the two decision points to determine the beneficiary's RMD requirement ?

First, what category of beneficiary is inheriting the deceased's retirement account? Second, when did the decedent die relative to their RBD?

The SECURE Act grandfathered beneficiaries for deaths prior to 2020, what exactly does that mean?

For clients with inherited accounts from deaths prior to 2020, it is important to work with the compliance department of the IRA or employer retirement plan. However, for deaths prior to 2020, the rules are exactly the same for spouses and estates. If the beneficiary was for a death prior to 2020, the rules that applied to a non-spouse EDB who was not more than 10 years younger than the decedent would give you the correct rules for these grandfathered accounts. Finally, deaths before or after 2020 that have a trust as a beneficiary call for consultations with a qualified attorney or compliance officer.

The advantages of maintaining the "qualified character" of a distribution by using a conduit IRA

For one, IRAs and qualified plans are treated differently when it comes to required minimum distributions. The RBD for distributions from employer-sponsored plans to participants other than those who own exactly 5% or more of the employer is April 1 of the year following the later of (1) attainment of age 73 according to SECURE 2.0 for 2023 and following, or (2) retirement. The RBD for IRAs (other than Roth IRAs) and 5% or more owners who participate in a qualified plan is April 1 of the year following the attainment of age 73, regardless of when an individual retires. A second reason for maintaining the qualified character of a distribution is that the next employer's retirement plan may offer loans. No IRA of any type can ever offer a retirement plan loan. Finally, distributions from an IRA are generally subject to a 10% early withdrawal if taken prior to age 59½. Qualified plan distributions may occur penalty-free following termination of employment after age 55. Note: Qualified retirement plans are not required to accept rollovers, and many do not.

What is something that happens when the client has multiple Roth IRAs?

Funds within one or more Roth IRAs are treated as if in one pooled account, categorized according to their source: annual contributions, conversions, or earnings. When distributions are made from one or more account(s), the funds are considered withdrawn according to a specific order. "Ordering" the money involves categorizing the funds based on their source or status. The funds are considered withdrawn, or "distributed," in the following "first-in, first-out" order: -annual contributions -the "included as income" portion of the first or earliest conversion, then the "included as income" portion of the next conversion, etc. -earnings

Which plans typically provide for hardship withdrawals? Describe circumstances that may justify such withdrawals.

Hardship withdrawals are generally available from TSA, profit sharing, and 401(k) plans only. The participant must demonstrate an "immediate and heavy financial need" and a "lack of reasonably available resources." Medical expenses, the purchase of a primary residence, tuition payments, and payments to prevent eviction from one's home are all occasions when the hardship withdrawals may be allowed.

How to Calculate the Maximum Allowed Withdrawal

Hardship withdrawals are limited to the amount needed to pay the applicable expense plus the income taxes (federal, state, and local) on the withdrawal. Formula: ($ for Need ÷ (1.0 - Total Tax Rate) = Maximum Hardship Available Ex. $10,000 ÷ (1 - .40*) = $16,667 * (24% + 6% + 10% EWP) $10,000 for the need. $4,000 for federal taxes. $1,000 for state taxes and $1,667 for 10% the EWP. Taxes are really a hardship for Damar! It costs 2/3 of the hardship amount. Surely Damar can find another source of funds. That is the exact point of the law. Hardship withdrawals have a high tax penalty to incentive people to find another source of the money. Maybe he can get some money elsewhere and only take the hardship withdrawal for the rest. There are two other points: Damar will think he only needs $10,000 for his current issue. However, if he only takes $10,000 as a hardship withdrawal, he will have another crisis when he files his taxes. Taking the money for the $10,000 crisis really only cuts his problem by a third. However, he would have the rest of the year to increase his withholding. Still, he needs to know that before taking the hardship withdrawal. Damar will be focused on his current tax problem, but a hardship withdrawal now will have a much larger long-term impact on his finances. If he withdraws $16,667 to clean up his current financial problem, the money will not be able to compound into the future. If this money stays in his retirement account for the 35 years until he is 65, it would grow to around $128,000-$247,000 (if his average return is 6-8%). Thus, taking care of a $10,000 problem at age 30 costs him between 12.8 and 24.7 times as much when he reaches 65. A CRPC should be able to perform these calculations and present them to their clients.

In-service withdrawals- Profit Sharing and 401(k) Plans

IRS guidelines generally permit 401(k) and other profit sharing plans to offer in-service withdrawals. In-service means you are still working for the employer sponsoring the plan. If a profit sharing plan provides for in-service withdrawals, generally, no special emergency or hardship conditions are required. The plan may, however, impose such restrictions. It may also require attainment of age 59½ or a service requirement (usually two to five years), or both. Plan provisions also specify the portions of the participant's account that may be available for in-service withdrawal—usually, only the vested portion of the employer's contributions (matching and nonelective contributions) prior to age 59½. Taking advantage of an in-service withdrawal is not only a way of obtaining cash from a plan, but it may also offer a good opportunity to expand the investment options available to your client if choices are limited by their employer-sponsored plan. By doing a direct or 60-day rollover of an in-service distribution to an IRA, an individual will typically find that they have more funds to choose from, often with lower investment fees. They may also have more freedom when naming beneficiaries and to create a customized income plan at retirement.

How is RMD determined when the client has multiple plans?

IRS rules allow a certain amount of aggregation, but only so much. Each IRA's RMD must be calculated separately. The total required minimum distribution can be taken from any one or several of these IRAs. This same aggregation rule applies to 403(b)s. Every other type of employer plan, however, must individually make an RMD. In other words, distributions from employer plans must be calculated on each plan and withdrawn from that plan.

What are the distribution options of the beneficiary when an IRA owner dies during retirement after their required beginning date?

If a surviving spouse is the sole eligible designated beneficiary, their required distribution period is the greater of their recalculated life expectancy factor (using the Single Life Table) or the deceased IRA owner's remaining actuarial life expectancy (using the Single Life Table and then subtracting one for each subsequent year). A spousal beneficiary is uniquely able to roll a lump sum distribution from the deceased's plan into an IRA in the surviving spouse's name. If an individual other than a spouse is the eligible designated beneficiary, the required distribution period is the greater of the eligible designated beneficiary's life expectancy (using the Single Life Table and then subtracting one for each subsequent year) or the deceased IRA owner's remaining actuarial life expectancy (using the Single Life Table for the decedent and then subtracting one for each subsequent year).

Nonspouse Eligible Designated Beneficiary (Deaths on or after RBD)

If an individual other than a spouse is the sole IRA eligible designated beneficiary, the required distribution period is the longer of: -their fixed-term or unrecalculated actuarial life expectancy (using the Single Life Table for the beneficiary) and then reducing by one each year -the deceased IRA owner's remaining unrecalculated actuarial life expectancy (fixed term/reduced by one year method using the Single Life Table). Where there is one individual, nonspouse eligible designated beneficiary who takes the benefits over their life expectancy, the required distribution period begins the year following the year of death and is based on the beneficiary's life expectancy determined by their age on the birthday in the year following the year of the participant's death. For each subsequent year, the life expectancy is that of the previous year reduced by one. (The nonspouse eligible beneficiary's RMD is calculated using the unrecalculated life expectancy reduced by one for each subsequent year.)

Estate, Charity, or No Named Beneficiary (Deaths on or after RBD)

If the beneficiary is not an individual (e.g., an estate or charity), the required minimum distribution is determined as if there is no designated beneficiary. Distributions must continue over the remaining distribution period of the deceased owner. The decedent's remaining distribution period is reduced by one each year. For a charity, this is usually not an issue because the charity will want the money right away. However, if the estate or certain trusts are the beneficiary, then this is an important issue.

Designated Beneficiary (only) (Deaths on or after RBD

If the beneficiary is only a designated beneficiary (not an eligible designated beneficiary), then the distribution is under the "Complicated 10-Year Rule."

Qualified Joint and Survivor Annuity (QJSA)

If the employee has been married for at least one year, a pension plan (defined benefit, money purchase, and target benefit) must provide a qualified joint and survivor annuity (QJSA), which continues to pay benefits as long as either the retiree or spouse continues to live. In effect, it is a life annuity that considers two lives. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. In other words, if the QJSA payout is $1,000 per month while both spouses are alive, the survivor's lifetime annuity cannot be less than $500, or more than $1,000 per month. In most cases, the payment to the survivor is 50% of the joint annuity. The QJSA might be thought of as a "default" payment option; it is automatic for the married plan participant and can only be changed with the spouse's written consent. Any option that eliminates the spouse's interest in the benefits of the plan must be formally delivered and accepted. A spouse must provide written consent waiving the QJSA option, including an acknowledgment of the effect of the waiver and the naming of another beneficiary.

When are profit sharing plans, including stock bonus plans and ESOPs not required to provide a QJSA?

If the following three conditions are met: 1. The plan does not allow for any life annuity options. 2. The plan does not accept direct transfers from other plans that are subject to QJSA. 3. The plan provides that the participant's vested benefits are payable in full, minus any outstanding loans, to the participant's spouse in the event the participant dies prior to retirement, although the spouse can waive the benefit.

What if the participant dies after retirement and after benefit distributions have begun?

If the participant dies after retirement and after benefit distributions have begun, the beneficiary may be able to choose between taking a lump sum distribution or annuitizing the benefit, if the plan so provides. However, if the deceased had already annuitized the benefit, no change can be made to this form of payment.

Spouse Sole Eligible Designated Beneficiary

If the sole IRA beneficiary is the spouse, they are a surviving spouse eligible designated beneficiary. Surviving spouse eligible designated beneficiaries when the decedent died prior to their RBD has the following options after the death of the original participant: Option #1: Roll inherited assets into their own IRA (treat as your own) Option #2: Transfer assets to decedent or inherited IRA

How does a direct rollover work?

In this arrangement, the client fills out paperwork instructing the trustee of the first qualified plan to make direct payment of all or part of their plan's assets or monetary value to the trustee of another qualified plan, SEP, TSA, governmental 457 plan, or IRA. The IRS requires a plan administrator to report the distribution that is rolled over on IRS Form 1099-R.

Indirect rollover

In this case, the client takes a distribution from a qualified plan, SEP, TSA, IRA, or governmental 457 plan and within 60 days rolls it over to an IRA, the qualified plan, SEP, TSA, or governmental 457 plan of a new employer. Any amount that is not rolled over by the 60th day after receipt of the distribution will be subject to income tax (and the 10% penalty, if applicable). Individuals can make only one indirect rollover from an IRA to another (or same) IRA in any 12-month period, regardless of the number of IRAs they own. This limitation does not apply to direct rollovers (trustee-to-trustee transfers) between IRAs or rollovers from traditional to Roth IRAs (conversions).

What is very important about IRA contributions?

It is critically important that contributions to IRAs and new employer accounts are coded as QPLO rollovers, not new contributions. This is especially for those under 59½.

When does the five-year clock start for a Roth IRA conversion?

It is important to note that a different five-year clock applies to a Roth IRA conversion; it begins with the year in which a distribution is converted into a Roth IRA. Furthermore, a separate five-year clock applies to each Roth IRA conversion.

What is important about extensions?

It is important to remind the client that an extension to a tax return is only an extension to file, not an extension to pay the tax bill. Thus, it is important to have the final estimate for income tax after any reductions due to QPLO rollovers calculated and paid by April 15th of the next year.

What is the major change from the SECURE Act for RMD rules governing employer retirement plans and IRAs following the original owner's death?

It made a major change by eliminating the use of life expectancies for most people and instead implemented the "10-year rule" for people who are not categorized as "eligible designated beneficiaries" as defined below.

How can distributions from a 401(k) or 403(b) Roth contribution account be qualified?

It must be made after a five-taxable-year period (described below) of participation and one of the following circumstances must apply: -the distribution must be received after the participant has reached age 59½ -the distribution must be received by the participant on account of their disability -the distribution must be paid to a beneficiary on account of the participant's death

The three bucket approach, part of the bucket strategy

It segments a portfolio based on specific times when the money will be needed in retirement. The first bucket is comprised of short-term, low-yielding, liquid investments that can be used to cover near term income needs (one to five years' worth of living expenses). The second bucket is structured to cover income needs that will occur in five to fifteen years. It includes a diversified stock portfolio and core bonds designed for moderate growth. Bucket 2 should act a hedge against inflation and as a "backup" to Bucket 1, should it be exhausted. Bucket 3 can be used later in life or for legacy purposes. Due to the long-term time horizon here, this bucket will be primarily invested in equities as well as higher-risk bonds/bond funds. In theory, this strategy sounds ideal. Be careful, though, because in practice it can be difficult to monitor and manage. The individual buckets will need to be reallocated frequently and redistributed over time. As the first bucket is depleted, investments with the highest returns will be sold and the proceeds will be used to replenish the depleted bucket. The key is for the first bucket to always have sufficient cash to cover the next one to five years' worth of living expenses regardless of what the market is doing. This can be challenging when the market is performing well, and the temptation is to shift assets from one's "safe bucket" to more aggressive investments, a move that undermines the very premise of the bucket strategy.

Qualified plans and TSAs may permit participants to borrow from their accrued benefits. What happens if loans are not repaid within the allowed period?

Loans that are not repaid within the specified period are treated as taxable distributions.

Why should you Think Twice About Rolling Company Stock to an IRA?

Many employees are tempted (even advised) to roll company shares from their profit sharing accounts to IRAs to avoid taxation on the cost basis of those shares. Doing so may be beneficial in the short run, but it may result in much higher taxes in the long run, particularly if the shares have greatly appreciated. Example. When he left his company this year, Jim took his 650 shares to a stockbroker, who advised him to put the stock into an IRA. Had he kept the stock outside of the IRA, he would have paid income taxes immediately, but only on the cost basis of $9 a share, far below the market value of the stock. His gain realized up to the amount of the NUA is entitled to preferential long-term capital gains treatment when the shares are sold. With the shares in an IRA, however, any withdrawals are taxed as ordinary income.

What is something important to remember about stock distributions?

Many tax advisers point to stock distributions as an area where people can save or lose significant amounts in taxes, depending on their choices. Use care when working with clients who have received stock distributions because there is more at stake than you may think!

Participant Dies Before RMDs Begin with Trust Beneficiary

Note: Since the passage of the SECURE Act, making a trust the beneficiary has certain pitfalls that are beyond the scope of the course. Anyone using a trust as a beneficiary of a retirement account should seek proper legal counsel. If a trust is named as beneficiary, the beneficiaries of the trust will be treated as the eligible designated beneficiaries or simply as designated beneficiaries, provided each of the following apply: -The trust is valid under state law or will be as soon as it is funded. -The trust must be irrevocable or will, by its terms, become irrevocable upon the death of the IRA owner, etc. -The beneficiaries of the trust must be identifiable. Although they don't have to be identified by name, it must be possible to identify the class (or group) of beneficiaries and the oldest beneficiary. -The trustee of the trust must deliver the final list of all beneficiaries of the trust and a copy of the trust document to the administrator of the qualified plan (or to the trustee or custodian of an IRA if an IRA is involved) by October 31 of the year following the year of death. In other words, if a trust is determined to be any type of beneficiary on September 30, the trust document must be delivered to the custodian one month later.

Substantially Equal Periodic Payments (SEPP)

One of the exceptions to the rule that qualified plan and IRA assets cannot be withdrawn prior to age 59½ without penalty. IRA owners who are younger than 59½ may access plan funds without penalty by taking equal installments at least once a year over their life expectancy or a joint life expectancy that includes the designated beneficiary. Payments must continue for five years or until the client attains age 59½, whichever is later. After five years or age 59½, payments from an IRA can be changed or even stopped.

What is a major point of the SECURE Act?

One of the major points of the SECURE Act is to raise revenue by limiting the ability of many people, especially healthy adult children and grandchildren of the deceased, to stretch an IRA or employer retirement account over decades. Some people find it helpful to name this group "non-eligible designated beneficiaries (NDBs) to differentiate designated beneficiaries from eligible designated beneficiaries.

What is a way to remember the four reasons for a qualified Roth IRA distribution?

One way to remember the four reasons for a qualified Roth IRA distribution is the "Denver Area Fire Department." Denver - D - Death Area - A -- Age 59½ Fire - F - First-Time Homebuyer (someone who has not owned a home in two years Department - D -- Disability

What is an option only available to a surviving spouse who is the sole eligible designated beneficiary?

Only a surviving spouse may move the IRA or employer retirement plan into their own name, add new contributions to the account, and be subject to the RMD rules as the original owner of the account.

Some qualified plans provide for in-service withdrawals by plan participants. Which types of qualified plans may permit withdrawals before the participant has reached age 59½?

Only profit sharing/stock bonus and thrift/savings plans may include provisions for in-service withdrawals by plan participants who are younger than age 59½.

Qualified Preretirement Survivor Annuity (QPSA)

Plans that are required to offer QJSAs must also offer qualified preretirement annuities (QPSAs). The QPSA must be the actuarial equivalent of the QJSA. In other words, there is a reduction for the earlier starting date of the annuity, but the amount must be line with the QJSA. (No cheating the younger widow or reducing the annuity amount beyond the reduction for the earlier payout.) Here is how a QPSA works. If the participant dies after attaining the earliest retirement age, it is assumed that he retired the day prior to his death with a QJSA beginning on the date of death. If the participant dies before attaining the earliest retirement age, it is assumed that: -They separated from service on the date of death. -Then they survived to the earliest retirement date possible. -On that day they elected early retirement and took an immediate QJSA. -And then they died the next day. Also, neither the plan nor the widow is allowed to delay the start of the QPSA beyond the month in which the participant would have attained the earliest retirement age. This means the widow would not receive anything from the retirement plan from the date the worker died until the worker would have been 55 in most cases, because 55 is the usual earliest retirement date for an employer plan. So if the worker died at 45, the widow would not receive anything from the retirement plan under a QPSA for 10 years. This may sound harsh, but this is a life insurance need, not a retirement plan obligation. Finally, it is interesting to note that the widow has no say in when the QPSA starts once the worker would have reached the earliest retirement age.

Designated beneficiary

Prior to the SECURE Act, a "designated beneficiary" was the person whose age went into the considerations for how long the retirement account could be stretched. That is still true for deaths prior to 2020. For deaths in 2020 and later, the SECURE Act changed being a designated beneficiary (only) to always meaning the maximum a retirement account can be stretched is to December 31 of the year containing the tenth anniversary of the decedent owner's death. In other words, being classified as a designated beneficiary for deaths in 2020 and later means neither the age of the decedent nor the age of the beneficiary is not important in calculating the stretch. The maximum stretch for these designated beneficiaries will always be the 10-year rule. At a minimum, a retirement vehicle needs to have a named designated beneficiary. A designated beneficiary is a human (individual) or certain trusts that name a human(s) as the beneficiary. To be effective, the beneficiary must be "designated" on September 30th of the year following the year of death. (Obviously, a beneficiary cannot be "named" after death; however, beneficiary designation forms and certain estate planning devices used by the participant may operate to allow the designation of the final particular beneficiary from a group of possible beneficiaries.) On the other hand, some arrangements can never be a "designated beneficiary." The two most important are a charity or an estate; however, certain trusts do not qualify as a designated beneficiary.

What is a "QDRO"? Explain its common use with respect to retirement plans.

QDRO is shorthand for qualified domestic relations order. It is a legal judgment mandating the distribution or attachment of one person's property on behalf of another. In cases of divorce, a part of one ex-spouse's retirement plan is often attached for the benefit of the other ex-spouse by means of a QDRO. QDROs do not apply to IRAs or retirement plans that utilize IRAs.

Qualified Longevity Annuity Contracts (QLAC)

QLACs are deferred annuities where the lifetime annuity payments do not begin until a later date, usually age 85. QLACs provide a cost-effective way for retirees to trade a portion of their savings for protection against the risk of outliving their assets. These annuities are effectively a pure, contractually guaranteed transfer of risk strategy. They solve the issue of longevity risk for individuals by transferring it to an insurance company, which is better equipped to manage it. QLACs are actually quite simple. There are no annual fees, they have a low upfront commission, and because they are required (currently) to be fixed annuities, there are no moving parts and no attachment to the market. One should think of the income generated by a QLAC as they do the income they receive from Social Security—as a guarantee, not as an investment. It is true that longevity annuities are not "sexy" and they do not produce double-digit returns, but they do have the potential to solve one of a client's biggest problems: longevity risk.

What happens when you default on a loan?

QPLOs are not available for those who default on their loans by failing to make the required loan payments. In this case, the person experiences a deemed distribution and the money is not eligible to be moved into another retirement plan. Likewise, QPLOs are not available when the legal requirements to establish a loan are violated. For example, if the loan was for a larger amount than legally allowed or the original loan violated the timing restrictions on the length of loan payments.

What is the formula for determining the required minimum distribution?

RMD= Balance in the plan on Dec. 31 of prior year/ life expectancy

Cautions with in-service withdrawals

Some companies impose penalties for taking such a distribution. Penalties could include a suspension of plan contributions and charges. If your client is considering rolling funds to an IRA, keep in mind that IRAs do not have the same creditor protections as qualified plans and do not offer loans. Also, 401(k) plans allow distributions after attainment of age 55 without penalty; with an IRA your clients need to wait until 59½ to avoid the early withdrawal penalty. Finally, if the distribution is not rolled over and is instead taken as cash, it could result in significant taxes and possible penalties. Because of these drawbacks, taking advantage of a qualified plan's loan provision may be more advantageous (if available). Loans are discussed in a following section.

Employer Stock Distributions

Some qualified plans make distributions of employer stock only or of employer stock and cash to terminating participants. For example, distributions from stock bonus plans are complicated by the fact that they are not made in cash, but in shares of employer stock. If there is no public market for the employer's shares, the employer must stand ready to buy the shares from the employee at fair market value, as determined by an independent appraiser.