Chapter 7 Distributions from Qualified Plans
-qualified joint and survivor annuity (QJSA) Other annuity options may include term certain features, which ensure that payments will continue even after death, for the number of years specified as the term certain. -ordinary income
-While the pension plan document dictates the distribution options available to the participant, a single life annuity is generally the automatic form of benefit for a single participant. However, married individuals must be offered a ____________. -Regardless of the form, distributions from qualified pension plans are generally characterized as _______ ________ for income tax purposes.
another designated Roth account or a Roth IRA direct rollover (i.e., not using the 60-day rollover) *If a distribution from a designated Roth account is made to an employee, the employee would still be able to rollover the entire amount (or any portion thereof) into a Roth IRA within 60-days.
A distribution from a Roth account is permitted to be rolled over into _________ or _________ without inclusion into gross income. Rollovers from a Roth account to another Roth account must generally be accomplished through a ______________
the assets are deposited into the recipient's IRA or qualified plan. *If a distribution pursuant to a QDRO is not deposited in an IRA or other qualified plan, the third-party alternate payee will be subjected to tax at ordinary income tax rates on the value of the distribution. *However, the distribution is not subject to the ten percent early withdrawal penalty if it is not deposited into the recipient's IRA or qualified plan, as this is one of the exceptions to the ten percent penalty
A distribution pursuant to a QDRO will not be considered a taxable distribution to the third-party alternate payee as long as...
$20,000 (the excess of $70,000 over $50,000) at the time of the loan because the loan exceeds the $50,000 maximum permissible loan limit. The remaining $50,000 loan is not a deemed distribution.
Adam has a vested accrued benefit of $200,000 and receives $70,000 to be repaid in level quarterly installments over five years. Adam has a deemed distribution of what amount?
received tax-free return of adjusted basis ordinary income
Amounts distributed as an annuity are taxable to the participant of a qualified plan in the year in which the annuity payments are ________. Each annuity payment is considered a partially __________ and partially __________ using an inclusion/exclusion ratio.
the name, age, and taxpayer identification number (TIN or ATIN) of the child or adoptee
An eligible adoptee is any individual, other than a child of the taxpayer's spouse, who had not attained age 18 or who is physically or mentally incapable of self-support. The taxpayer is required to include what on the tax return for the year of the distribution?
surviving spouse / non-spouse In addition, an inherited IRA from a spouse can be converted to a Roth IRA.
An in-plan Roth rollover can be elected by a beneficiary of an inheritance if the beneficiary is a ________ but cannot be elected by a ________ beneficiary.
separate interest approach *This approach is often used when the retirement plan is being divided pursuant to divorce but before the participant retires.
Another QDRO approach, often called the "____________," divides the participant's retirement benefit into two separate portions. Depending on the plan document, this may give the alternate payee the right to receive a lump-sum distribution equal to the present value of the account balance or a separate right to receive their portion of the retirement benefit payable at a later time similar to that of the participant.
Mr. B can separate his $400,000 IRA into two $200,000 IRAs and take substantially equal periodic payments from only one of them. This would result in a payment of $7,775.45
Assume that Mr. B wants to use the fixed annuitization method for substantially equal payments from his $400,000 IRA, but only needs $7,775.45, not $15,550.89 per year. What would you recommend Mr. B do?
ordinary income estate
Assuming the qualified pre-retirement survivor annuity QPSA is elected and the surviving spouse receives the benefit, there is no adjusted basis in the benefit. Thus, the full value of distribution under the QPSA is subject to __________ tax in addition to _______ tax.
an annuity payable for the remainder of the participant's life. *The plan may also provide for a lump-sum distribution option that pays the participant an amount equal to the present value of the annuity.
At the participant's normal retirement age, a pension plan will typically distribute retirement benefits through...
1. A qualified rollover contribution (we will use the word conversion for short), which generally means transferring assets from a traditional IRA or qualified plan to a Roth IRA. 2. An in-plan Roth rollover, whereby pre-tax funds in a qualified plan are converted or rolled over into a Roth account in a 401(k) plan, 403(b) plan, or governmental 457 plan.
Benefits and Implications of a Roth Conversion There are two basic types of "conversions" that permit a taxpayer to change pre-tax retirement funds into Roth funds:
• tax reduction/tax diversification, • tax-deferred funds transfer, • minimum distribution avoidance, and • possible estate tax reduction.
Benefits of Conversion The benefits of conversion include the possibility of:
$50,000 at the date the loan is made. The $50,000 will be taxed as ordinary income and potentially subject to a 10% early withdrawal penalty unless Byron meets one of the exceptions.
Byron has a vested accrued benefit of $100,000, and he takes a $50,000 loan. The loan is repayable in level quarterly installments over seven years, and Byron is using the proceeds to buy a new car. Because the repayment period of the loan exceeds the maximum term of five years, Byron has a deemed distribution of what amount?
$10,000. Deana is subjected to this limitation because her highest outstanding balance within twelve months of December 30, 2022 (the day before the date of the calculation) is $40,000. The otherwise maximum permissible loan amount of $50,000 must be reduced by $40,000 to determine the ultimate maximum loan amount available of $10,000.
Deana has $125,000 in vested plan benefits. She borrowed $40,000 on January 1, 2022 from her 401(k) plan and repaid $25,000 on August 14, 2022. On December 31, 2022, Deana's maximum permissible loan from the plan would be what?
-termination of employment, -early retirement, -normal retirement, -disability, or -death
Distributions from pension plans are normally made because of the participant's: (5 events)
ordinary income
Distributions from qualified plans that have an adjusted basis will be partially treated as a nontaxable return of basis while the remaining portion of the distribution will be taxed as ______ ______.
forced payout The Department of Labor regulations now requires that forced payouts between $1,000 and $5,000 be directly rolled to an IRA if the participant has not made a timely election and the plan requires a forced payout. A forced payout for amounts less than $1,000 are not affected by this change.
Early Termination If the participant's vested account balance is less than $5,000, then the law permits, but does not require, the plan to distribute the balance to the participant if the participant does not make a timely election. This situation is called a _______ ______.
48-year-old (his age) and a 53-year-old (the age of the oldest beneficiary).
Ellis begins taking substantially equal periodic payments from his IRA using the required minimum distribution method in 2023. On his birthday in 2023 Ellis turns age 48. On January 1, 2023, Ellis has two beneficiaries named on his IRA, his daughter, Imelda, who turns age 29 in 2023 and his brother, Vinnie, who turns age 53 in 2023. If Ellis elects to use the joint and survivor tables, he will use the joint life expectancy of a...
• Attainment of age 59 1⁄2 • Death • Disability • Substantially equal periodic payments (IRC Section 72(t)) • Separated from service after attainment of age 55 • Dividends paid from an ESOP • IRS tax levy on a plan • Medical expenses that exceed 7.5% percent of AGI • Qualified domestic relations order (QDRO) • Qualified military reservist called to active duty • Qualified public safety employee who separates from service after age 50 • Qualified birth or adoption distributions*
Exceptions to 10% Early Withdrawal Penalty [12]
$15,000 (50% of $30,000) [max of $50,000] $5,000 *The remaining $15,000 is a permissible loan and would not be a deemed distribution. The $5,000 will be taxed as ordinary income and potentially subject to a 10% early withdrawal penalty unless Ginger meets one of the exceptions.
Ginger has a vested accrued benefit of $30,000 and borrows $20,000 from her plan as a loan repayable in level monthly installments over five years. Ginger's maximum permissible loan is _________. Ginger has a deemed distribution of _______ at the date of the loan.
-traditional IRA -Roth IRA
IRS Notice 2014-54 provides rules for allocating pre-tax and after-tax amounts among disbursements that are made to multiple destinations from a qualified plan. For example, a retiree who has pre-tax and after-tax funds in a 401(k) plan may want to rollover the pre-tax portion to a ___________ and the after-tax funds to a ________.
qualified plan traditional IRA direct rollover
If a qualified plan consists of employee after-tax contributions, these contributions may be rolled over into another _________ that accepts after-tax dollars or into a __________. In the case of a rollover of after-tax contributions from one qualified plan to another qualified plan, the rollover can only be accomplished through a __________.
1. Required Minimum Distribution Method 2. Fixed Amortization Method 3. Fixed Annuitization Method
If the distribution is part of a series of substantially equal periodic payments, also called Section 72(t) distributions, made at least annually for the life or life expectancy of the participant or the joint lives or joint life expectancies of the participant and the participant's designated beneficiary, the payments will not be subjected to the ten percent early withdrawal penalty. The payments must begin after the participant has separated from service (for qualified plans; IRAs do not have this requirement), and to be considered substantially equal periodic payments, the payments must be made in any one of the following three ways
recharacterize the conversion contribution prior to the due date (plus extensions) for filing his Federal income tax return for 2017 Colin notifies the trustee of the Roth IRA and the trustee of the traditional IRA that he is recharacterizing his IRA contribution. On his Federal income tax return for 2017, he treats the original amount of the conversion as having been contributed to the traditional IRA and not the Roth IRA.
In May 2017, Colin converts $100,000 in his traditional IRA to a Roth IRA. The value of the assets in the Roth IRA drops by 40 percent due to a significant decline in the stock market that occurs in October 2017. The Roth conversion results in Colin incurring $100,000 of taxable income, when he could have waited and converted only $60,000 (after the 40 percent drop). Colin should do what?
• made on or after the date on which the owner attains age 59 1⁄2, • made to a beneficiary or estate of the owner on or after the date of the owner's death, • is attributable to the owner being disabled, or • for first-time home purchase (lifetime cap of $10,000 for first-time homebuyers (includes taxpayer, spouse, child, or grandchild) who has not owned a house for at least two years).
In order to be a qualified distribution in which earnings are both tax free and penalty free, the distribution must satisfy both the five-year rule and the distribution rule. The distribution must satisfy one of the following requirements for Roth IRAs or one of the first three requirements for Roth accounts:
taxable income in the year of conversion. The converted amount will generally be reported on Form 1099-R. To the extent there are after-tax funds in the account that is being converted, these funds are not subject to taxation.
It is important to understand that when funds are converted, it requires that the pre-tax conversion amount be included into...
20% (The 20 percent withholding requirement does not apply to hardship distributions or loans) *If income tax is not withheld or insufficient income tax is withheld, the recipient may be required to make estimated tax payments or otherwise be subject to penalties for insufficient withholdings or estimated tax payments. *This withholding requirement only pertains to qualified plans and not to distributions from IRAs.
Just as the government requires an employer to withhold a specific amount of tax from an employee's wages to ensure that the government receives the income tax, a distribution from a qualified retirement plan is also subject to income tax withholding requirements. Generally, the plan custodian is required to withhold a mandatory _______% from most non-periodic distributions (any payment that is not part of an annuity) made to the participant.
$10,000 ($5,000 per child) each The entire $20,000 qualifies for the penalty exception. *An individual who receives an eligible birth or adoption distribution is permitted to later repay up to the amount of the distribution to an eligible retirement plan to which a rollover contribution could be made.
Karl and Salina became the proud parents of twin girls on March 3, 2022. On January 4, 2023, Karl and Salina want to each take the maximum allowed distribution from their respective qualified plans. How much can they take out without penalties?
$180,000/260=excludable amount of payment ($692.31) $3,000-$692.31= $2,307.69 subject to ordinary income tax
Kim, who is single and age 62, (260 anticipated payments) is a participant in a qualified plan from which she is to receive annuity payments of $3,000 per month. Kim has an adjusted basis in the qualified plan in the amount of $180,000. How much of each annuity distribution to Kim is subject to ordinary income?
IRAs Accounts
Minimum distributions are not required for Roth ______ but are required for Roth _______.
1. the distribution must represent the employee's entire accrued benefit in the case of a pension plan or the full account balance in the case of a defined contribution plan; 2. a distribution of the balance of a participant's entire accrued benefit or account balance must be made within one taxable year; and 3. the distribution must be on account of either the participant's death, attainment of age 59 1⁄2, separation from service (does not apply to self-employed individuals in the plan), or disability.
NUA tax treatment requires a "lump sum distribution." A lump sum distribution does not require that all assets be distributed at the same time and to the same account. A lump-sum distribution must meet the following three requirements:
fully taxed *In the event that the participant dies before recovering all of the cost basis, a deduction (miscellaneous itemized deduction not subject to a two percent floor) will be available on the participant's final income tax return for the unrecovered investment.
Once the participant has recovered the entire cost basis of the annuity, all future monthly payments will be ________.
tax free and penalty free *Two tests must be met for a distribution to be considered a qualified distribution: (1) the five-year rule and (2) the distribution rule.
Qualified distribution is ______ free and ________ free.
1. Direct rollover 2. Indirect rollover
Rollovers may be accomplished in one of the two following ways:
after the owner dies Minimum distributions force taxpayers to take distributions so that the government can generate tax revenue. Roth IRAs do not have this same requirement until after the owner dies.
Roth IRAs are not subject to minimum distributions until...
The inherited stock will receive an adjustment of basis to FMV at date of death less any unrecognized NUA. The tax will be paid when the assets are disposed of by the heirs. (The heirs will pay the deferred LTCG on the NUA upon sale of the stock)
Stock that was part of a distribution from a qualified plan may be transferred upon the death of the participant to a beneficiary or heir. The question arises, "How should this stock be treated by the beneficiary for tax purposes?"
the distributed employer securities are sold. *While the lump-sum distribution rules require a full distribution, they do not preclude the ability to roll the remaining assets in the plan, other than the employer securities for which NUA treatment is desired, to an IRA to retain tax deferral on those amounts, nor do they preclude the ability to distribute only a portion of the employer securities under NUA and roll the remaining portion to an IRA to retain tax deferral.
Taxpayers who receive a lump-sum distribution of employer securities (such as stock) may receive special tax treatment on the distribution. This tax treatment consists of favorable capital gain treatment instead of ordinary income tax treatment on the NUA portion of the distribution as well as deferral of recognition of the gain on the NUA portion until when?
-open the IRA and deposit $85,000 (not $68,000) within 60 days of receiving the $68,000 check. *Terrance will then receive a tax refund of the $17,000 withheld when he files his federal income tax return. To avoid the 20% withholding requirement, Terrance could have initiated a direct rollover (trustee-to-trustee transfer) from the 401(k) to his new IRA.
Terrance, age 28, took a distribution from his 401(k) plan of his entire account balance of $85,000. He intended to rollover the $85,000 to an IRA at a brokerage company, but decided to receive the check himself rather than have the custodian do a direct trustee-to-trustee rollover. The custodian of the 401(k) plan withheld 20% of the account balance ($17,000) (as required by law) and sent Terrance a check in the amount of $68,000. In order to avoid having to recognize any taxable income, Terrance must do what?
April 1 of the following year December 31 of the tax year *However, such a delay only applies to the first distribution and could cause a bunching of income in the year after the participant attains the age of 72 since the second RMD must still be taken by December 31 of that same year.
The first RMD distribution is for the year in which the participant attains the age of 72 but may be delayed until the required beginning date (RBD) which is _______. However, for each year thereafter, the RMD must be taken by __________.
written notarized waiver (In some cases, the signature can be witnessed by a plan official instead of being notarized.) *The waiver may be made beginning the first day of the plan year in which the participant attains age 35 until the day the participant dies.
The nonparticipant spouse is offered the qualified pre-retirement survivor annuity QPSA and may choose whether to accept or waive the option. The QPSA may be waived by the nonparticipant spouse via a ______________
five years from the date of the first payment or the participant attaining the age of 59 1⁄2. *Revenue Ruling 2002-62 and Notice 2022-6 allow a taxpayer to make a one-time irrevocable switch from the fixed amortization or fixed annuitization methods to the required minimum distribution method.
The payment calculated under one of the three methods determined above (RMD method, fixed amortization method, or fixed annuitization method) must continue exactly as calculated for the later of ______ or __________.
the full account balance of the qualified plan in the first year of the substantially equal periodic payments. The addition of this amount to the participant's taxable income will also subject the participant to an early withdrawal penalty as well as penalties and interest for the years passed since the first year of the distribution.
The payment calculated under one of the three methods determined above (RMD method, fixed amortization method, or fixed annuitization method) must continue exactly as calculated for the later of five years from the date of the first payment or the participant attaining the age of 59 1⁄2. If the payments change in any way, the participant will be considered to have made a distribution equal to what?
the cost of the employer securities (value of securities at the date of the employer contribution) *Any value above that value is Net unrealized appreciation NUA
The portion of the lump-sum distribution (in an NUA) attributable to _____________ will be taxable as ordinary income to the participant in the year of the distribution and this value is considered the participant's adjusted basis in the employer securities.
...gross income in the taxable year in which the distribution occurs. ten percent early withdrawal *In addition, one would not have the ability to change their mind or recharacterize the conversion. *And to be eligible for an in-plan Roth rollover, an amount must be vested.
The taxable amount of a distribution that an individual rolls over in an in-plan Roth rollover is includible in... However, the rollover amount is not subject to the _______ penalty regardless of age.
One. Waiting period does not apply to indirect rollovers to or from qualified plans, nor does it apply to conversions from traditional IRA to Roth IRA. There can also be an unlimited number of direct rollovers during the year.
To prevent potential abuse, the IRS only permits an individual to have how many indirect rollovers from an IRA per year?
True
True or False A qualified joint and survivor annuity and qualified pre-retirement survivor annuity are required for pension plans.
True
True or False Designated beneficiaries for minimum distributions are determined on September 30 of the year following the year of the participant's death.
True
True or False Distributions before a participant attains the age of 59 1/2 will generally be subject to a 10% penalty.
False -
True or False Distributions from qualified plans are always treated as ordinary income.
True
True or False For deaths prior to January 1, 2020, stretch IRAs were best accomplished by choosing young beneficiaries.
False
True or False If the participants are already separated from the service due to retirement and they wait until they attain age 55 to begin distributions, then they will not be subject to the 10% penalty.
False -
True or False Inherited IRAs are protected in bankruptcy because they are IRAs.
True
True or False Leaving an IRA to a spouse could be a better way to stretch an IRA than leaving it to a child.
True
True or False Trusteed IRAs allow IRA owners to control how distributions from the IRA will be paid out and to whom the assets will pass to after the death of the primary beneficiary.
True
True or False With regard to minimum distributions, a surviving spouse receives more favorable options than any other type of beneficiary in the event of the owner's death.
(1) the five-year rule and (2) the distribution rule. The distribution must be made after a five-taxable-year period which begins January 1st of the taxable year for which the first regular contribution is made to a Roth IRA or Roth account of the individual or, if earlier, January 1st of the taxable year in which the first rollover or conversion contribution is made to any Roth IRA of the individual. The five-year clock for Roth IRAs is based on the earliest Roth IRA if the taxpayer has multiple Roth IRAs. For each Roth account (within a qualified plan), the five-year rule is based on the specific Roth account. Roth accounts are not grouped like Roth IRAs.
Two tests must be met for a distribution to be considered a qualified distribution:
1. three minimum distributions 2. taxpayers are permitted to combine the value of all of their IRAs in determining the required minimum distribution *It is important to understand that a minimum distribution must be taken from each qualified plan in which the taxpayer has an account balance. *Inherited IRAs, however, require a separate distribution from each inherited IRA.
Upon reaching age 72, taxpayers are required to begin taking minimum distributions. 1. If the taxpayer had three qualified plans resulting from previous jobs, then how many distributions would have to be taken? 2. If the taxpayer had three IRAs, then how many distributions would have to be taken?
•Qualified Joint and Survivor Annuity (QJSA) • Single Life Annuity (if QJSA is waived or no spouse) • Lump-Sum
What are the pension plan normal retirement age distribution options (3):
uniform lifetime table joint life expectancy table *Utilizing the joint life expectancy tables will result in a longer life expectancy and decrease the RMD.
When calculating the RMD for the plan participant, always use the __________, which accounts for the age of the account holder and one other person who is ten years younger. One exception to this rule occurs when the participant's sole designated beneficiary is the participant's spouse, and that spouse is more than ten years younger than the participant. In that case, use the ____________ to calculate the RMD.
Pension plans
_______ ______ are generally not permitted to offer in-service withdrawals to participants unless the participant is engaging in a phased-in retirement beginning at age 591⁄2 or older. A phased retirement is intended to enable older workers to become part-time employees and receive benefits to maintain their current earnings level; however, because of the continued accrual of benefits, plans often do not permit such withdrawals.
another qualified plan or an IRA *In certain situations when a distribution is taken as a lump-sum distribution, the recipient may receive favorable tax treatment on the distribution (net unrealized appreciation (NUA), ten-year forward averaging, and/or pre-74 capital gain treatment). These favorable tax treatments will be lost if the distribution is rolled over to an IRA or to a plan that is not a qualified plan.
A distribution from a pension plan may be rolled over into __________ or _______ provided the participant is not required to begin taking the required minimum distributions. If the assets are rolled over, the participant defers recognition of ordinary income until the assets are distributed from the rollover account.
qualified plan qualified plans IRAs *This exception may be extremely helpful to those employees who take an early retirement package and need funds from their retirement plan prior to receiving Social Security benefits.
A distribution to an employee from a _________ will avoid the ten percent early withdrawal penalty if it is made after the employee has separated from service for the employer maintaining the plan and such separation from service occurred during or after the calendar year in which the employee attained age 55. It is important to note that this exception is only applicable to distributions from _______ and is not available to distributions from _______.
1. $50,000 less the highest outstanding loan balance within the previous twelve months, or 2. The difference between the greater of: • One-half of the vested accrued benefit under the plan, or • $10,000 and the value of any outstanding loan balance from the plan at the time of a new loan.
A loan from a qualified plan is considered a distribution, which is subject to taxation and possibly the early withdrawal penalty, unless the loan amount is less than or equal to a certain limit set forth by IRC Section 72(p). The limit for a new loan is the lesser of:
• the participant made after-tax contributions to a contributory qualified plan, or • the participant was taxed on the premiums for life insurance held in the qualified plan. *When a plan participant contributes after-tax funds to a qualified plan, the participant will have an adjusted basis in the qualified plan equal to the amount of after-tax funds contributed to the plan during participation.
A participant will have an adjusted basis in distributions received from a qualified plan if either of the following have occurred:
1. The plan provides that the participant's nonforfeitable accrued benefit is payable in full, upon the participant's death, to the participant's surviving spouse (unless the participant elects, with spousal consent, that such benefit be provided instead to a designated beneficiary). 2. The participant does not elect the payment of benefits in the form of a life annuity.
A qualified joint and survivor annuity (QJSA) must be provided, but can be waived, to married participants of a pension plan and must also be provided to married participants of profit-sharing plans unless the plan meets the following criteria: (2 things)
-a lump-sum distribution, -a rollover distribution, -a single life annuity, -a joint life annuity option The plan may also offer in-service distributions and hardship withdrawals before retirement
A qualified plan may, by law, offer a wide range of distribution options, but each plan document establishes the options actually available to the participants of a particular plan. Generally, qualified plans offer a variety of distribution options including:
the employer stock is sold. *At the date the employer stock is sold, Cody's adjusted basis in the stock will be $500,000, the amount taxed as ordinary income in the year of distribution. If he subsequently sells the stock for any amount greater than $500 per share, then Cody will have a capital gain. The first $1,500,000 of gain will be taxable as long-term capital gain and any gain in excess will be short or long-term capital gain depending on the holding period after the distribution date.
Cody received a lump-sum distribution of his employer's stock from his qualified plan. The lump-sum distribution consisted of 1,000 shares of the employer's stock valued at $2,000,000 as of the date of the distribution. The value of the stock at the date the employer contributed the stock to the plan was $500,000. When Cody receives the $2,000,000 lump-sum distribution of the employer stock, $500,000 of the distribution will be taxed as ordinary income in the year of the lump-sum distribution. The remaining gain of $1,500,000 will not be recognized until when?
$500,000 *The remaining gain of $1,500,000 will not be recognized until the employer stock is sold.
Cody received a lump-sum distribution of his employer's stock from his qualified plan. The lump-sum distribution consisted of 1,000 shares of the employer's stock valued at $2,000,000 as of the date of the distribution. The value of the stock at the date the employer contributed the stock to the plan was $500,000. When Cody receives the $2,000,000 lump-sum distribution of the employer stock, _________ of the distribution will be taxed as ordinary income in the year of the lump-sum distribution.
• 10-year forward averaging • Pre-1974 capital gain treatment • Net unrealized appreciation (NUA) *Simply because a distribution may qualify for one of the special tax treatments does not mean that it is the best choice for the individual receiving the distribution. In many cases, the best choice may be to roll the distribution into an IRA (or another qualified plan) and defer taxation.
Distributions from qualified plans are generally taxed as ordinary income, however, lump-sum distributions from a qualified pension or profit-sharing plan may receive special income tax treatment. When a distribution is considered a lump-sum distribution, the distribution may qualify for one of the following special tax treatments:
1. receive a lump-sum distribution of the qualified plan assets, 2. roll the assets over to an IRA or other qualified plan, or 3. leave the funds in the pension plan. These options depend on the plan document. Many pension plans do not have lump-sum options.
Early Termination A participant who terminates employment before normal retirement age may have up to three options:
$3,000 of income and $4,000 of investment Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B's gross income. *The 5-year clock began when the Roth IRA was opened
Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B's designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $_______ of income and $________ of investment in the contract.
rollover or transfer the balance of the account into another tax-advantaged qualified plan or an IRA account to continue to defer the recognition of income taxes until the ultimate distribution of the assets from the new plan. *Generally, a participant will elect to rollover an account balance when the participant has terminated employment but would like to continue to benefit from the tax-deferred growth of the assets and plan for retirement.
Even when the participant has the option of taking a lump-sum distribution, the participant is not required to withdraw the account balance. Instead, the participant may elect to ...
poor planning or because the account owner wants to use the funds during the 60-day period. *To prevent potential abuse, the IRS only permits an individual to have one indirect rollover from an IRA per year.
Indirect rollovers usually occur due to...
$8,000 will be treated as ordinary income and $800 is the penalty
Kris, who is 40 years old, takes a distribution from his IRA to purchase a new ski boat. The distribution is in the amount of $10,000. However, 20 percent of the distribution is not taxable because it is deemed a return of basis, which is from Kris making non-deductible IRA contributions in prior years. What amount will be ordinary income and what is the penalty?
payroll deductions 5 years *The five-year repayment rule does not apply to loans that are used for the purchase of a principal residence. [must be paid over a reasonable time] presumably over 30 years
Loans from qualified plans are usually repaid through ____________ and must generally be repaid within ______ years from the date the loan commences; otherwise, the loan is treated as a distribution as of the date of the original loan. Loans treated as a distribution will be treated in the same manner as any other distribution from a qualified plan and will be subject to ordinary income tax and potentially the early withdrawal penalty of 10 percent if the participant fails to meet one of the exceptions
April 1 of next year.
Mary, age 74, works at the local grocery store. She is a participant in the grocer's profit-sharing plan but has not begun taking RMDs because she is still working and is not a >5% owner. If Mary terminates employment on August 1 of this year, she must take her first RMD by...
shared payment approach *This approach is often used when a participant has already begun to receive a stream of payments from the plan, usually at retirement, such as a life annuity.
One QDRO approach, often called the "__________," splits the actual benefit payments made between the participant and the alternate payee. Thus, each payment that would be made to the participant under the plan is split such that the alternate payee receives part of the payment and the participant receives the remaining portion of the payment. Under this approach, the alternate payee will not receive any payments unless the participant receives a payment or is already in pay status.
April 1 of 2023 December 31 of 2023 *An exception to the general RMD for qualified plans exists if a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 72. The exception is not available for any participant that owns more than five percent of the ownership of the plan sponsor in the year the participant reaches the age of 72.
Paul turned 72 in March of 2022. He was a participant in a qualified plan with his previous employer but has not received any distributions since retirement in 2021. Since Paul turned age 72 in 2022, his first distribution year is for 2022. The last date he can take his distribution for 2022 without incurring a minimum distribution penalty is ________. The last date he can withdraw his distribution for 2023 is _________.
1. Automatic waiver 2. Private letter ruling 3. Self-certification *An automatic waiver of the 60-day deadline will apply if: (1) the correct procedures set forth by the financial institution for depositing the rollover were followed, but the funds were not actually deposited within the 60-day period solely due to an error on the part of the financial institution, and (2) the funds are deposited into the plan or IRA within one year from the beginning of the 60-day rollover period.
The IRS has the authority to extend the 60-day (indirect) rollover period when a person's failure to comply is due to events beyond the reasonable control of that person. If the 60-day deadline is missed, there are three ways to avoid the distribution being taxable (plus a penalty if applicable):
• errors committed by a financial institution, • inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error, • the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed), and • the time elapsed since the distribution occurred.
The IRS has the authority to extend the 60-day (indirect) rollover period when a person's failure to comply is due to events beyond the reasonable control of that person. In determining whether to grant such a waiver, the IRS will consider all relevant facts and circumstances, including:
ten-year forward averaging, the benefit of pre-1974 capital gain treatment, and the benefit of net unrealized appreciation (NUA). *These considerations, along with potentially higher account or investment fees and other material differences must be reconciled when recommending a rollover from a qualified plan to an IRA.
The decision to rollover qualified plan assets into an IRA should be considered carefully. Once the assets are deposited into the IRA, the assets will continue to benefit from the tax-deferred growth until a distribution is taken from the IRA account. However, any assets deposited into the IRA lose the ERISA alienation protection, the benefit of [3 benefits]
False -
True or False Loans from qualified plans can never exceed 50% of the participant's vested account balance.
False -
True or False Loans from qualified plans must always be repaid within five years.
False - Pension plans typically distribute retirement benefits through an annuity payable for the remainder of the participant's life. The plan may provide for a lump sum distribution option, but generally provide the annuity.
True or False Pension plans generally provide a lump-sum distribution.
True
True or False Profit-sharing plans may allow for in-service withdrawals.
False -
True or False QDROs allow retirement benefits to be distributed to a payee spouse without triggering a tax consequence.
False - Neither direct not indirect rollovers may consist of any distribution from a qualified plan that is one of a series of substantially equal periodic payments. In addition, distributions on account of a required minimum distribution and hardship withdrawals may not be rolled over into another qualified plan or IRA.
True or False Rollovers can consist of distributions of any kind including those from a qualified plan that are part of a series of substantially equal periodic payments.
True
True or False Sam has a vested account balance in her employer-sponsored qualified profit-sharing plan of $18,000. Sam had an outstanding loan balance within the prior 12 months of $9,000 that had been reduced to $6,000. The maximum loan Sam could take from this qualified plan is $4,000.
False -
True or False See-through trusts are the same as trusteed IRAs.
False -
True or False Stretch IRAs are available for all designated beneficiaries.
False -
True or False The eligible beneficiaries of an inherited IRA will use the life expectancy of the youngest beneficiary on the account.
False -
True or False The first minimum distribution must always be taken no later than April 15 of the year following the year the participant attains the age of 72.
False -
True or False The law requires loans from qualified plans to be repaid upon the participant's termination of employment from the plan sponsor.
An indirect rollover The IRS has the authority to extend the 60-day rollover period when a person's failure to comply is due to events beyond the reasonable control of that person.
What is a distribution to the participant with a subsequent transfer by the participant to another account? In this instance the original custodian issues a check to the participant in the amount of the full account balance reduced by the 20 percent mandatory withholding allowance. In order to complete it, the participant must then reinvest the full original account balance of the qualified plan (including the 20 percent mandatory withholding) within 60 days of the original distribution into the new qualified plan or IRA. The 60-day clock starts with the participant's constructive receipt of the distribution (usually upon receipt of the check).
Open a Roth IRA with a nominal contribution during the year 20X1. Then roll from the Roth 401(k) to the Roth IRA in year 20X7, he will have fulfilled the 5-year requirement for qualified distributions from the combined funds. The original Roth IRA contribution sets the clock for both the Roth IRA and the rollover from the Roth 401(k). If, however, Shane does not make any Roth IRA contributions and then rolls from the Roth 401(k) to a Roth IRA in year 20X7, he will not have fulfilled the 5-year requirement because his first contribution to a Roth IRA was from the rollover in 20X7, making the clock start January 1, 20X7.
When Shane graduates from college in the year 20X1, he begins to contribute to a Roth 401(k) offered by his employer. Shane does not intend to stay at that employer for more than seven years, and plans to roll the funds from the Roth 401(k) to a Roth IRA upon separating from service from the employer. He may then want to use some of the funds to purchase a condo, his first home. What would you advise Shane to do?
A direct rollover All qualified plans must provide for the availability of direct rollovers of certain distributions. If the participant elects a direct rollover, then the original plan custodian is not required to withhold 20 percent of the distribution for federal income tax.
________ _________ occurs when the plan trustee distributes the account balance directly to the trustee of the recipient account. It is usually completed with a wire transfer from the old custodian to the new custodian or a check is issued from the old custodian negotiable only by the custodian of the new account.
Net unrealized appreciation (NUA) Fair Market Value at Date of Distribution - Value of Securities at the Date of the Employer Contribution = Net Unrealized Appreciation
________ is defined as the excess of the fair market value of the employer securities at the date of the lump-sum distribution over the cost of the employer securities at the date the securities were contributed to the qualified plan.
Ten-year forward averaging and pre-1974 capital gain treatment *Under ten-year forward averaging, the income tax due on a lump-sum distribution is calculated by dividing the taxable portion of the lump-sum distribution by ten and then applying the 1986 individual income tax rates to the result (one-tenth of the total taxable distribution). This result is then multiplied by ten to determine the total income tax due on the distribution.
_________ and ________ are applicable only to qualified plan participants born before January 2, 1936 and are, therefore, of limited application or nearly obsolete today.
A qualified pre-retirement survivor annuity (QPSA)
____________ must also be provided to married participants of a pension plan or a profit-sharing plan utilizing the same criteria as qualified joint and survivor annuity (QJSA) A ________ provides a benefit to the surviving spouse if the participant dies before attaining normal retirement age. A _______ is essentially a term insurance policy paid for by a reduction in the ultimate pension plan retirement benefit that the participant would have received from the plan at normal retirement age.
