Course 5 Module 7. Distribution Rules, Alternatives and Taxation

James Stewart, age 60, dies in July 2021 before retirement. He has elected his wife Anita as his beneficiary. Anita receives a lump sum death benefit of $250,000 from a life insurance policy held by a qualified plan. The insurance contract's cash value was equivalent to $160,000 at James's death. During his lifetime, James had reported an insurance cost of $25,000. What is the nontaxable amount of the $250,000 distribution? $250,000 $225,000 $135,000 $160,000 $115,000

$115,000 The nontaxable amount is the total of the participant's cost basis and the pure insurance amount. Therefore, it is calculated as follows: $250,000 (death proceeds) - $160,000 (cash value) = $90,000 (pure insurance amount) + $25,000 (cost basis) = $115,000 (nontaxable amount).

Larry, age 50, has a vested account balance in a Section 401(k) plan of $300,000. Larry has accepted a new job and is taking a lump-sum distribution from his Section 401(k) plan and has notified his plan administrator he intends to rollover the distribution within 60 days. What amount will Larry receive in the lump-sum distribution? $210,000 $300,000 $270,000 $240,000

$240,000 If the direct transfer method is not chosen in the case of a distribution from a qualified plan, Section 403(b) plan, or eligible Section 457 governmental plan, the distribution is subject to mandatory withholding at 20%. Larry will receive $240,000 and $60,000 with be withheld for federal income taxes.

Patty is retiring this year and has a Section 401(k) account balance of $500,000, of which $200,000 is invested in employer stock. The employer basis in the stock when contributed was $50,000. If Patty takes a lump-sum sum distribution from the plan and makes a net unrealized appreciation (NUA) election, what is the tax treatment of the distribution of the employer stock? $150,000 is taxed as capital gain this year. $200,000 is taxed as ordinary income this year. $50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock. $150,000 is taxed as ordinary income this year and $50,000 is taxed as long-term capital gain when Patty sells the stock.

$50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock. The employer basis in the stock is taxed as ordinary income in the year of the lump-sum distribution and the gain at the time of the distribution is taxed as long-term capital gain when the stock is subsequently sold. In this example, $50,000 is taxed as ordinary income this year and $150,000 is taxed as long-term capital gain when Patty sells the stock.

Patty is retiring this year and has a Section 401(k) account balance of $500,000, of which $200,000 is invested in employer stock. The employer basis in the stock when contributed was $50,000. If Patty dies before making the lump-sum distribution, what amount is subject to inclusion in her gross estate for estate tax purposes? $200,000 $50,000 $150,000 $500,000

$500,000 The entire value of a qualified plan death benefit is subject to inclusion in the decedent's gross estate for federal estate tax purposes.

If the direct rollover method is not chosen in the case of a distribution from a qualified plan, the distribution is subject to mandatory withholding. What is the percentage of the mandatory withholding? 10% 20% 30% 50%

20% If the direct rollover method is not chosen in the case of a distribution from a qualified plan, Section 403(b) plan or eligible Section 457 governmental plan, the distribution is subject to mandatory withholding at 20%. Distributions from a rollover IRA and employee stock option plan cannot be rolled over.

If a qualified plan participant has reached age 72 and commenced required minimum distributions (RMDs), what is the penalty if less than the RMD amount is distributed? There is no penalty. 10% of the RMD for the tax year. 50% of the RMD for the tax year. 50% of the difference between the RMD for the year and the amount distributed.

50% of the difference between the RMD for the year and the amount distributed. If the annual distribution is less than the minimum amount required, there is a penalty of 50% of the amount that should have been distributed but was not distributed.

An election to waive the joint and survivor form must be made before the annuity starting date. The annuity starting dates commences after what time frame? 30 days 45 days 60 days 90 days

90 days An election to waive the joint and survivor form must be made during the 90-day period ending on the annuity starting date, that is, the date on which benefit payments should have begun to the participant.

Any distribution from an eligible retirement plan is eligible for rollover, except which of the following? (Select all that apply) A required minimum distribution. A distribution that is one of a series of substantially equal periodic payments payable for a period of ten years or more. A distribution that will be rolled from one 401(k) plan to another 401(k) plan. A hardship distribution.

A required minimum distribution. A distribution that is one of a series of substantially equal periodic payments payable for a period of ten years or more. A hardship distribution. Any distribution from an eligible retirement plan is eligible for rollover, except a required minimum distribution, a distribution that is one of a series of substantially equal periodic payments payable for a period of ten years or more or for the life or life expectancy of the employee or the employee and a designated beneficiary, or a hardship distribution.

Taxable part of a plan distribution is determined by the total cost basis divided by the total payout. The cost basis includes: (Select all that apply) After-tax contributions made by the employee. Rollovers to other plans. Cost of life insurance protection reported as taxable income by the participant. Employer contributions previously taxed to the employee. Plan loans included in income as a taxable distribution.

After-tax contributions made by the employee. Cost of life insurance protection reported as taxable income by the participant. Employer contributions previously taxed to the employee. Plan loans included in income as a taxable distribution. The cost basis includes employee after-tax contributions, cost of life insurance reported as taxable income, employer contributions taxed to employee and plan loans included as taxable income. However, rollovers are not included in cost basis because they are not taxed at the time of being rolled over. They are generally made to defer tax until the time the funds are actually withdrawn from the plan

Plan Provisions - Required Spousal Benefits

All qualified pension plans must provide two forms of survivorship benefits for spouses, the qualified preretirement survivor annuity and the qualified joint and survivor annuity. Both of these options represent an "annuity" payment, that is a check every month for life rather than a single amount paid out at once. Stock bonus plans, profit-sharing plans, and employee stock ownership plans (ESOPs) generally need not provide these annuity survivorship benefits for the spouse if the participant's nonforfeitable account balance is payable as a death benefit to that spouse.

Rollover of a Death Benefit

An additional factor in the treatment of death benefits involves rollovers to an IRA. A spouse can roll over the death benefit received from a participant to the spouse's IRA. It can also be rolled over to any other eligible retirement plan. Distributions from qualified plans, 457 government plans, and tax-sheltered annuities can be rolled over in a direct trustee-to-trustee transfer to a non-spouse beneficiary's inherited IRA.

Each of the following statements regarding an in-service partial plan distribution made this year from a qualified plan is correct EXCEPT: A taxable in-service distribution may also be subject to the early distribution penalty. In-service distributions generally will be subject to mandatory federal income tax withholding at 20%. An in-service distribution is not eligible for rollover. An in-service distribution is deemed to include both nontaxable and taxable amounts.

An in-service distribution is not eligible for rollover. An in-service distribution may be transferred to an eligible retirement plan by means of a direct transfer rollover.

Capital Gains

As mentioned earlier, a plan participant who attained age 50 before January 1, 1986, can elect to treat pre-1974 plan accruals as long-term capital gain under pre-1987 law, taxed at 20%.

Other than Spouse Beneficiary

Defined benefit plans may allow a participant to choose a joint annuity with a beneficiary other than a spouse, for example, an annuity for the life of a participant with payments continuing after the parent-participant's death to a son or daughter. Tax regulations limit the amount of annuity payable to a much younger beneficiary in order to ensure that the participant personally receives and is taxed on at least a minimum portion of the total value of the plan benefit. It also ensures that plan payments are not unduly deferred beyond the participant's death. Thus, a much younger beneficiary, except for a spouse, generally would not be allowed to receive a 100% survivor annuity benefit.

Defined Benefit Plan Distribution Provisions

Defined benefit plans must provide a married participant with a joint and survivor annuity as the automatic form of benefit. For an unmarried participant, the plan's automatic form of benefit is usually a life annuity, which is typically a series of monthly payments to the participant for life, with no further payments after the participant's death. Many plans allow participants to elect to receive some other form of benefit from a list of options in the plan. However, to elect any option that eliminates the benefit for a married participant's spouse, the spouse must consent on a notarized written form to waive the spousal right to the joint and survivor annuity. This is not just a legal formality. In consenting to another form of benefit, the spouse gives up important and often sizable property rights in the participant's qualified plan benefit that are guaranteed under federal law.

Lump Sum

Defined contribution plans often provide a lump sum benefit at retirement or termination of employment. Defined contribution plans may also allow the option of distributions at will over the retirement years. That is, the participant simply takes out money as it is needed, subject to the minimum distribution requirements. Such distribution provisions provide much flexibility in planning. However, many plans only allowed certain structured withdrawals or may have an "all or nothing" policy. The plan document, specific to the plan determines the rules. If a participant's balance in the plan is greater than $5,000, the plan cannot force anyone to remove money from the account. If a participant's balance is lower than $5,000 but greater than $1,000, the plan can transfer that balance into an IRA for the participant's benefit. For participant balances less than $1,000, the plan may simply distribute the assets to the participant. In all cases of account balances below $5,000, the plan will provide the participant with notice and allow them to either take a distribution or arrange for a transfer before the plan takes any action.

Dave Miller is 75 and is part of his employer sponsored retirement plan. Dave does not have to take minimum distributions from his work plan or any other retirement plan that is subject to the minimum distribution rules. False True

False It is true that Dave does not have to take minimum distributions from the plan of his current employer, but he is required to take distributions from the plans of any prior employers or from any IRA accounts that he has.

Employees that contribute after-tax money into their account will have to pay federal income taxes on those contributions when the money is withdrawn. State True or False.

False. Employees that make after-tax contributions can receive these amounts free of federal income taxes, although the order in which they are recovered for tax purposes depends on the kind of distribution.

Retirement plans are required to provide the same distribution options. State True or False.

False. Retirement plans may be different in regards to distributions. It is important to review the summary plan document (SPD) of a plan to identify the plan's distribution options.

Tax Impact

For many plan participants, retirement income adequacy is more important than minimizing taxes to the last dollar. Nevertheless, taxes on both the federal and state levels must never be ignored, as they reduce the participant's bottom line, financial security. The greater the tax on the distribution, the less financial security the participant has. The more tax you pay, the less real retirement income you will have. A qualified plan distribution may be subject to federal, state and local taxes, in whole or in part. The federal tax treatment is generally the most significant, because federal tax rates are usually higher than state and local rates. Also, many state and local income tax laws provide a full or partial exemption or especially favorable tax treatment for distributions from qualified retirement plans.

Which of the following are reasons why a participant would NOT want to take a lump sum distribution? Click all that apply. High tax bracket Late distribution penalty Mandatory 20% withholding Mandatory 10% withholding Early distribution penalty

High tax bracket Mandatory 20% withholding Early distribution penalty A participant may not want to take a limp sum distribution because he or she may be in a high tax bracket. In addition, he or she may be subject to the 20% mandatory withholding and early distribution penalties.

Total Distributions

If the participant begins annuity payments based on the entire account balance, the nontaxable amount will be proportionate to the ratio of total after-tax contributions, that is, the employee's cost basis, in the plan to the total annuity payments expected to be received. If the participant withdraws his or her entire account balance, the distribution may be eligible for the lump sum distribution treatment. Total distributions may also be subject to the early distribution penalty. In addition, certain distributions may be subject to mandatory withholding at 20%, unless such distributions are rolled over by means of a direct rollover.

Life with period-certain annuities does not provide payments for the life of the annuitant, but for a specified period of time, usually 10 to 20 years, in which of the following circumstances? (Select all that apply) If the participant dies before the end of the period Only if the participant does not die until the end of the period If the participant and spouse die before the end of the period Only if the participant and spouse do not die until the end of the period

If the participant dies before the end of the period If the participant and spouse die before the end of the period Life with period-certain annuities provides payments for a specified period of time, usually 10 to 20 years, even if the participant, or the participant and spouse, both die before the end of that period. Thus, the life with period-certain annuity makes it certain that periodic benefits will continue for the participant's heirs even if the participant and spouse die early.

Defined Contribution Plan

If the plan is a defined contribution plan, the qualified preretirement survivor annuity is an annuity for the life of the surviving spouse. The plan document will usually state that the beneficiary will receive a retirement benefit based on the assumption that the employee retired on the date of death and selected a joint and survivor 50% option. However, the beneficiary usually has the option of receiving a lump sum of the account balance rather than an income for life.

Annuity

In a Defined Contribution plan, annuity benefits are computed by converting the participant's account balance in the defined contribution plan into an equivalent annuity. In some plans, the participant can elect to have his or her account balance used to purchase an annuity from an insurance company. The same considerations in choosing annuity options would then apply. If the plan offers annuity options, the required joint and survivor provisions apply.

Defined Benefit Plan

In a defined benefit plan, the survivor annuity payable under this provision of law is the amount that would have been paid under a qualified joint and survivor annuity if the participant had either (1) retired on the day before his or her death (in the case of the participant dying after attaining the earliest retirement age under the plan); or (2) separated from service on the earlier of the actual time of separation or death and survived to the plan's earliest retirement age, then retired with an immediate joint and survivor annuity (in the case of the participant dying before attaining such age).

Penalty Taxes on distributions

In addition to the complicated regular tax rules, distributions must be planned so that recipients avoid, or at least are not surprised by, tax penalties for withdrawals made too early or too late. There is also a certain amount of minimum distribution that must be taken at a particular time or penalties will apply.

Advantages of Deferred Payout

In contrast to a lump sum distribution, the plan participant can opt to take a deferred payout of the plan funds. The advantages of a deferred payout are: Deferral of taxes until money is actually distributed, Continued tax shelter of income on the plan account while money remains in the plan, and Security of retirement income. Practitioner Advice: It is common to elect a direct transfer. This will defer the payout and thus the tax and provide the client with the freedom to invest plan proceeds at the participant's discretion.

Interest on Loans

Interest on a plan loan, in most cases, will be consumer interest, which is generally not deductible by the employee, unless the loan is secured by a home mortgage. Interest deductions are specifically prohibited in two situations: 1. If the loan is to a key employee, as defined in the Internal Revenue Code (IRC) Section 416 rules for top-heavy plans, or 2. If the loan is secured by a Section 401(k) or Section 403(b) tax-deferred annuity plan account based on salary reductions.

The waiver of the preretirement survivorship benefit in favor of an optional benefit has to be consented to by the nonparticipant spouse. The consent to waiver must meet which of the following requirements? (Select all that apply) It has to be in writing It must be certified by the plan administrator It must acknowledge the effect of the waiver It has to be witnessed by a plan representative or a notary public.

It has to be in writing It must acknowledge the effect of the waiver It has to be witnessed by a plan representative or a notary public. The consent of the nonparticipant spouse to waiver of the preretirement survivorship benefit in favor of an optional benefit form selected by the participant must be in writing, acknowledge the effect of the waiver and be witnessed, either by a plan representative or a notary public. There is no regulation about certification by a plan administrator.

A qualified plan can offer a wide range of distribution options. Participants benefit from having the widest possible range of options, because this increases their flexibility in personal retirement planning. Which of the following is a disadvantage of having such a wide range of options? There are no disadvantages to having a wide range of options It increases administrative costs It reduces the total distribution amount It increases tax liability of the participant

It increases administrative costs A wide range of options increases administrative costs. Also, the IRS makes it difficult to withdraw a benefit option once it has been established, though this anti-cutback rule has been eased somewhat for plan years beginning after December 31, 2001. Consequently, most employers provide only a relatively limited menu of benefit forms for participants to choose from.

A spouse waiver of the survivorship annuity benefit must meet all of the following requirements EXCEPT: It must be in writing. It must not change the benefit payable to the participant. It must acknowledge the effect of the waiver. It must be witnessed, either by a plan representative or a notary public.

It must not change the benefit payable to the participant. Electing out of the preretirement survivorship benefit will generally increase the participant's benefit after retirement.

Grandfathered rules are applied to taxation of plan participants who attained age 50 before which date? January 1, 1974 January 1, 1986 July 1, 1986 January 1, 1987

January 1, 1986 Grandfathered rules related to after-tax contributions and 10-year averaging are applied to taxation of plan participants who attained age 50 before January 1, 1986.

A defined benefit plan must provide a married participant with which of the following as the automatic form of benefit? Joint and survivor annuity Life annuity Fixed payments for 10 years Fixed payments to age 90

Joint and survivor annuity Defined benefit plans must provide a married participant with a joint and survivor annuity as the automatic form of benefit.

A defined benefit plan typically provides an unmarried participant with which of the following as the automatic form of benefit? Fixed payments for 10 years Joint and survivor annuity Life annuity Fixed payments to age 90

Life annuity For an unmarried participant, a defined benefit plan's automatic form of benefit is usually a life annuity, which is typically a series of monthly payments to the participant for life, with no further payments after the participant's death.

Loans can be given to employees from the 401(K) plan contributions made by them. However, interest on these loans is not tax-deductible by the employee unless which of the following? It is secured to take care of a family emergency. Loan interest from a 401(k) plan may be deductible if the loan is used to acquire the borrower's primary residence. It is secured for taking care of the medical expenses of the plan participant and his or her dependent family. It is secured by a key employee.

Loan interest from a 401(k) plan may be deductible if the loan is used to acquire the borrower's primary residence. The interest for 401(K) loans is typically not deductible but an exception does exist for primary residence loan interest.

Which of the following are the requirements of the Code Section 4975(d)(1)? (Select all that apply) Loans are made available to all participants on a reasonably equivalent basis. Loans are made in accordance with provisions in the plan. Loans of larger amounts in proportion to their contributions are made available to highly compensated employees. Loans made available bear reasonable rates of interest. Loans are adequately secure.

Loans are made available to all participants on a reasonably equivalent basis. Loans are made in accordance with provisions in the plan. Loans made available bear reasonable rates of interest. Loans are adequately secure. The requirements of the Code are that loans are available to all participants on a reasonably equivalent basis and in accordance with specific provisions set forth in the plan. The loans must bear reasonable rates of interest and must be adequately secured. Loans must not be made available to highly compensated employees in an amount greater than the amounts made available to other employees.

Which of the following are distribution options provided by defined contribution plans? (Select all that apply) Lump sum distribution at retirement Lump sum distribution at termination of employment Annuity distribution over the retirement years Nonannuity distributions over the retirement years as necessary Annuity distributions before retirement as necessary

Lump sum distribution at retirement Lump sum distribution at termination of employment Annuity distribution over the retirement years Nonannuity distributions over the retirement years as necessary Defined contribution plans provide a lump sum benefit at retirement or termination of employment or annuity over the retirement years. Defined contribution plans often also allow the option of taking out nonannuity distributions over the retirement years as they are needed. However, these annuity distributions cannot be made before retirement.

Qualified Preretirement Survivor Annuity

Once a participant in a plan requiring spousal benefits is vested, the nonparticipant spouse acquires the right to a preretirement survivor annuity, payable to the spouse in the event of the participant's death before retirement. This right is an actual property right created by federal law. A Qualified Pre-Retirement Survivor Annuity (QPSA) will provide a monthly payment to the surviving spouse of a plan participant who dies before reaching retirement age. The benefit received by the spouse is often equal to percentage (usually 50%) of what the plan participant would have received if they had retired. The surviving spouse may have the option of a lump sum payment rather than the annuity payment for life.

Which of the following correctly describes the payment structure of a life with a 10-year certain annuity? Payments are distributed for life to the annuitant and continue for the balance of 10 years if the annuitant does not survive 10 years from the commencement of the payments. Payments are distributed for life to the annuitant and then for 10 additional years to the beneficiary. Payments are distributed for 10 years and then terminate. Payments are distributed for 10 years to the annuitant and then for life to the beneficiary.

Payments are distributed for life to the annuitant and continue for the balance of 10 years if the annuitant does not survive 10 years from the commencement of the payments. A life with period-certain annuity provides payments for life, but if the annuitant dies before a specified period, usually 10 to 20 years, the beneficiary will continue to receive payments until the period is over.

Neely participates in her retirement plan. She received a notice to elect a survivorship benefit, but never made the election. What is her automatic benefit? No preretirement survivor benefit Preretirement survivor benefit Nonspousal benefit

Preretirement survivor benefit The preretirement survivor annuity is an automatic benefit. If no other election is made, a preretirement survivor annuity is provided.

Early distributions from which retirement plan will attract a penalty of 25% during the first two years of participation in the plan? SIMPLE IRAs Section 403(b) tax-deferred annuity plans IRAs SEPs

SIMPLE IRAs Early distributions from qualified plans, Section 403(b) tax-deferred annuity plans, IRAs and SEPs are subject to a penalty of 10% of the taxable portion of the distribution. In the case of SIMPLE IRAs, the penalty is increased to 25% during the first two years of participation.

Which of the following plans is NOT required to provide the qualified preretirement survivor annuity (QPSA) and the qualified joint and survivor annuity (QJSA) provision? Section 401(k) Plan Cash Balance Plan Target Benefit Plan Money Purchase Pension Plan

Section 401(k)plan All pension plans are required to provide the qualified preretirement survivor annuity and the qualified joint and survivor annuity provision. A Section 401(k) plan is not a pension.

For participants to borrow from a plan, the plan must specifically permit such loans. Loan provisions are most common in defined contribution plans, particularly profit-sharing plans. From which of the following plans are loans permitted? (Select all that apply) Section 403(b) plan Simple IRAs SEPs Section 401(k) plan

Section 403(b) plan Section 401(k) plan Any type of qualified plan or Section 403(b) tax-deferred annuity plan may permit loans. However, if the plan is subject to ERISA, loans from Section 403(b) tax-deferred annuity plans are subject to the prohibited transaction rules and penalties. Section 401(k) plans are qualified plans and therefore allow loans. There are considerable administrative difficulties connected with loans from defined benefit plans because of the actuarial approach to plan funding. Loans from IRAs and SEPs are not permitted.

All qualified pension plans must provide two forms of survivorship benefits for spouses, the preretirement survivor annuity and the joint and survivor annuity. The plans that need not provide for such survivorship benefits for spouses, if the participant's nonforfeitable account balance is payable as a death benefit to that spouse, are which of the following? (Select all that apply) Defined contribution pension plans Defined benefit plans Stock bonus plans Profit sharing plans Employee stock ownership plans

Stock bonus plans Profit sharing plans Employee stock ownership plans All qualified pension plans, including defined benefit plans and defined contribution plans, must provide two forms of survivorship benefits for spouses, the qualified preretirement survivor annuity and the qualified joint and survivor annuity. Stock bonus plans, profit sharing plans and ESOPs generally need not provide these survivorship benefits for the spouse if the participant's nonforfeitable account balance is payable as a death benefit to that spouse.

Which of the following is NOT a condition that must be satisfied for a distribution from a qualified plan to qualify as a lump-sum distribution? The distribution must be due to the participant's death, disability, attainment of age 59 ½, or separation from service (common law employees only). The distribution must include all of the participant's assets from all plans of the employer. All assets must be removed within the same year. The distribution must be transferred using a direct transfer rollover.

The distribution must be transferred using a direct transfer rollover.

The early distribution will attract a penalty if: (Select all that apply) The participant has not attained the age of 59½. It is made to the plan participant's beneficiary or estate before the participant's death. It is made upon separation from service before attainment of age 55. It is made to pay health insurance costs while unemployed.

The participant has not attained the age of 59½. It is made to the plan participant's beneficiary or estate before the participant's death. It is made upon separation from service before attainment of age 5 The early distribution penalty does not apply to distributions made on or after attainment of age 59½. Early distribution will also not attract a penalty if it is made to the plan participant's beneficiary or estate on or after the participant's death. The penalty is also not applicable if it is made to pay health insurance costs while unemployed. However, the early distribution penalty is applicable if it is made upon separation from service before attainment of age 55.

Automatic Benefit

The preretirement survivor annuity is an automatic benefit. If no other election is made, a preretirement survivor annuity is provided. If the plan permits, a participant can elect to receive some other form of preretirement survivorship benefit, including no preretirement survivorship benefit at all, or survivorship benefits payable to a beneficiary other than the spouse. However, the spouse must understand the rights given up and must consent, in writing, to the participant's choice of another form of benefit. The right to make an election of a benefit other than the preretirement survivor annuity must be communicated to all vested participants who have attained age 32. The participant can elect to receive some benefit other than the preretirement survivor annuity at any time after age 35. The participant can also change this election at any time before retirement.

Required Minimum Distributions (RMD)

The rules for determining and paying required minimum distributions were greatly simplified by proposed regulations issued in January 2001. Under these provisions, the required minimum distribution each year is generally determined by dividing the account balance at the end of the preceding year by the appropriate number in the IRS table called Uniform Lifetime shown below. The account balance is determined as of the last valuation date in the preceding year. For example, Ken reaches age 73 in 2022. His qualified account balance as of the end of 2020 was $400,000. Ken's required distribution for 2022 is $16,194.33 ($400,000 divided by 24.7, the Uniform Lifetime factor for a 73-year-old). The Uniform Lifetime factors are essentially the life-expectancy factors that would apply to a distribution over the joint life expectancy of the participant and a joint annuitant who is 10 years younger than the participant. However, except for the young-spouse exception, The Uniform Lifetime table is generally used regardless of who is named as beneficiary. An exception to this method of calculation using the Uniform Lifetime table is described below: A more favorable minimum distribution, that is, a lower required annual amount, is available for a participant whose beneficiary is a spouse more than 10 years younger than the participant. In this case, a minimum distribution can be determined using the actual joint life expectancy of the participant and the spouse.

Grandfathered Rules

The tax break for lump sum distributions was 10-year averaging from 1974 through 1986. For an individual who attained age 50 before January 1, 1986, the 10-year averaging provision is grandfathered. Such an individual may elect to use 10-year averaging using the 1986 tax rates, taking into account the prior law zero bracket amount. A further grandfather rule retains the capital gain rate of 20% for the capital gain portion of distributions that is attributable to pre-1974 accumulations, if any, to participants who attained age 50 before January 1, 1986, and elect capital gain treatment. The capital gain treatment is not mandatory. Distributes should elect it only if it produces a lower overall tax. Ten Year Forward Averaging and Pre-1974 Capital Gains Treatment (as well as Net Unrealized Appreciation) require the client to meet the specific lump sum distribution rules.

Failure to roll over the distribution within 60 days subjects it to income taxes, even if the employee may be eligible to elect 10-year averaging. Which of the following gives the Secretary of the Treasury the right to waive the 60-day rule? (Select all that apply) There has been a disaster in the locality of the plan participant. The participant instructed his or her employer regarding the rollover, but it was not done on time by the plan administrator. The participant has met with a disastrous accident. The taxpayer was given erroneous advice that caused the delay.

There has been a disaster in the locality of the plan participant. The participant has met with a disastrous accident. The Secretary of the Treasury may waive the 60-day rule where it would be against equity or good conscience to enforce it, including cases of disaster, casualty or other events beyond the participant's control. However, there is no legislative basis for waiving the 60-day rule for pre-2002 distributions, even where the delays were the result of erroneous advice or the inaction of third parties.

Retirement Plan Rollovers

With tax-deferred retirement accounts, taxes become due when the funds are distributed. However, taxes can be deferred further if the funds are redeposited in another tax-deferred retirement account within 60 days. This tax-free transfer of assets from one retirement plan to another is called a rollover. Practitioner Advice: It is helpful to distinguish between a rollover from a plan which involves the participant taking possession of the assets and a direct transfer in which the assets are passed from the plan to another trustee. It's not a question of who gets the distribution check, but rather, who it is made out to. When it is made out the participant, the rollover rules apply. When it is made out to a new trustee (For The Benefit of the participant) the direct transfer guidelines apply. In "real life" both are often referred to, generically, as a rollover but practitioners must be aware of the distinct and substantial differences between the two options.

Larry, age 50, has a vested account balance in a Section 401(k) plan of $300,000. Larry and his spouse are in the process of finalizing a divorce and 50% of Larry's Section 401(k) plan balance will be transferred to his soon-to-be former spouse under a Qualified Domestic Relations Order (QDRO). If Larry is in a 22% marginal income tax bracket, what is the total income tax and penalty will Larry owe on the distribution? $0 $48,000 $15,000 $33,000

$0 Larry is not subject to income tax or penalty for funds distributed under a QDRO. If not rolled over, the recipient is subject to regular income tax on the distribution but distributions under a QDRO are exempt from the 10% early withdrawal penalty tax.