FP 105: Class 5

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FP 105 Class 5

• Distributions, Loans and Rollovers.
• Brought to you by Michael S. Orentlich
• Sit back and enjoy!

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Exceptions for IRAs

• A taxable distribution of an IRA prior to age 59
  ½ is subject to a 10 penalty. (usually)
• The 10 penalty can be waived under certain
  situations for an IRA
• Distributions made after attainment of age 59 1/2
• Participant's death
• Participants disability
• Substantially equal payments at least annually
  over the IRA holders life or the joint lives of
  the individual and beneficiary. (Has to be the
  greater of 5 years or to 59 1/2.)
• Distributions for medical care in excess of 7.5
  of the individuals AGI.
• Distributions to pay for health insurance
  premiums due to job loss and a minimum of 12
  consecutive weeks of unemployment.
• Distributions for higher educational costs
  (tuition, fees, books, supplies and equipment)
  for the taxpayer, spouse, child or grandchild.
• Distributions to pay acquisition costs of a first
  home of a participant, spouse, child, grandchild
  or ancestor of the participant or spouse, up to
  10,000.

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Exceptions for Qualified and 403(B) Plans

• Taxable distributions from Qualified and 403(b)
  Plans are subject to a 10 penalty except
• After 59 1/2
• Death
• Disability
• Substantially equal payments (Separation from
  service is required)
• Medical expenses above 7.5 floor
• Separation from service after attainment of age
  55
• Qualified domestic relation order

4
Qualified Domestic Relation Order

• A QDRO is a decree, order, or property settlement
  under state law relating to child support,
  alimony, or marital property rights that assigns
  part or all of a participants plan benefits to a
  spouse, former spouse, child or other dependent
  of a participant.

5
Loans and for Qualified Plans TSAs

• For participants to borrow from a plan, the plan
  must specifically permit loans
• Loans provisions are most common in defined
  contribution plans
• Defined benefit plans rarely allow for loans.
• Loans from SEPs, SIMPLEs, and IRAs are not
  permitted
• Also, loans must meet the requirements set out in
  code section 4975(d)(1)
• loans made by the plan are available to all
  participants on a reasonably equivalent basis.
• loans are not made to highly compensated
  employees in an amount greater than the amounts
  made available to other employees.
• loans are made in accordance with specific
  provisions regarding loans set forth in the plan.
• loans bear reasonable rates of interest
• loans are adequately secured.

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Loans continued...

• In 2001, loans to the following were prohibited
  transactions unless the Secretary of Labor grants
  an administrative exemption.
• owner employee( greater than 10) of an
  unincorporated business
• a person who is more than a 5 shareholder of an
  S corporation
• In 2002 and beyond, loans can be made to the
  above.

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Loans Continued...

• Any loan from a qualified plan or TSA will be
  treated as a taxable distribution if it does not
  meet the requirements of code section 72(P)
• Section 72(p) provides that aggregate loans from
  qualified plans to any individual participant
  cannot exceed the lesser of
• 50,000, reduced by the excess of the highest
  outstanding loan balance during the preceding
  one-year period over the outstanding balance on
  the date the loan is made, or
• One-half the present value of the participants
  vested account balance.
• Please note a loan of 10,000 can be made even if
  it is more than one-half the participants vested
  balance.
• Loans must be repayable within 5 years unless the
  loan was used to buy a principal residence.

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Qualified Plans Distributions

• All qualified pension plans must provide two
  forms of survivorship benefits for the spouse.
• The Qualified pre-retirement survivor annuity
• In a defined benefit plan, the survivor annuity
  payable under this provision of the law is the
  amount that would have been paid under a
  qualified joint and survivor annuity if the
  participant had either
• In the case of the participant dying after
  attaining the earliest retirement age under the
  plan, retired on the day before death.
• In the case of the participant dying before
  attaining( the earliest retirement age under the
  plan) such age, separated from service on the
  earlier of the actual time of separation or death
  and survived to the plans earliest retirement
  age, then retired with an immediate joint and
  survivor annuity.

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Qualified Plans Distributions Continued...

• If the plan is a defined contribution plan, the
  qualified pre-retirement survivor annuity is an
  annuity for the life of the surviving spouse that
  is at least 50 of the participants vested
  account balance as of the date of death.
• The pre-retirement survivor annuity is an
  automatic benefit.
• If the plan permits, other forms of retirement
  survivor benefit can be chosen.
• If so, the spouse must understand and consent.
• In writing that acknowledges the effect of the
  waiver.
• Witnessed by a plan representative or a notary.

10
Qualified Joint and Survivor Annuity

• A qualified joint and survivor annuity is a
  post-retirement death benefit for the
  participants spouse.
• The survivor annuity must not be less than 50 of
  nor greater than 100 of the annuity payable
  during the joint lives of the participant and
  spouse.
• As with the pre-retirement survivor annuity, a
  participant may elect to receive another form of
  benefit but the spouse must consent in writing.

11
Pension Maximization

• Example

12
Lump Sum Distributions

• A lump sum distribution from a qualified plan may
  be desirable for retirement planning purposes and
  may be eligible for special tax treatment.
• Five year income averaging Gone
• Ten Year income averaging Still available if he
  or she attained age 50 before January 1,
  1986.(born before January 1, 1936) ,
• Use 1986 tax rates.
• Lump sum/10 multiplied the tax rate.
• Example Nathan, who was born March 8th, 1930,
  decided to receive his money purchase pension
  plan in a lump sum. His untaxed balance was
  500,000. What will be his tax? Assume, the tax
  on 50,000 with 1986 tax rate is 11,000

13
Rollovers

• For distributions after 2001, tax free
  rollovers of distributions to and from
  qualified plans, IRA, 403(b)s, SEP and Section
  457 governmental plans are allowed.
• If a distribution from a qualified plan, 457 or
  403(b) is not a direct rollover, the distribution
  is subject to a 20 mandatory withholding.
• Distributions of IRAs are not subject to the
  mandatory 20 withholding but must be rolled over
  within 60 days or be subject to tax and may be
  subject to a 10 penalty.
• ( allowed once per year)

14
Minimum Distributions

• Minimum distributions from qualified plans,
  Section 403(b) tax deferred annuity plans, SEPs,
  SIMPLE IRAs and Section 457 governmental deferred
  compensation plans must begin no later than April
  1 of the calendar year following the later of
• The calendar year in which the employee turns 70
  1/2
• The employees retires (not available to more than
  5 owner of a business)
• Any minimum distribution not taken is subject to
  a 50 excise tax.
• The initial annual minimum distribution is
  determined by dividing the participants account
  balance(December 31st of the year preceding age
  70 1/2) by the the appropriate number in an IRS
  table.

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Minimum Distributions Continued...

• There are only two tables used now for
  calculating life expectancy.)Much simpler and
  more advantageous for the participant)
• MDIB
• Joint life expectancy table
• The MDIB is used for all cases unless a spouse is
  10 years younger than the participant.
• Investors who are already taking minimum
  distributions can use this new calculation.
• IRA owners can change their beneficiaries at any
  time during their lifetime without negatively
  affecting RMD

16
Distributions At Death
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Stretch IRAs

• Under the new rules, beneficiaries have until
  December 31st of the year after the account owner
  dies to split an IRA into individuals IRAs and
  use their own life expectancies to calculate the
  remaining distributions.
• Example IRA owner dies with a 500,000 IRA with
  three beneficiaries.
• Spouse, age 70
• Child, age 50
• Grandchild , age 20
• Under old rulesDistributions are taken over the
  life expectancy of the oldest beneficiaries.

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Example Continued..

• Assuming an 8 rate of return.
• Spouse inherits 250,000
• Child inherits 125,000
• Grandchild inherits 125,000
• Total distributions 1,575,651 using the life
  expectancy of the spouse(16 years).
• Under the new rules Each beneficiary can break
  out their share of the IRA to there own and start
  receiving distributions over their life
  expectancies Spouse inherits 250,000, 16 years
  total payout525,217
• Child inherits 125,000, 33 years total
  payout633,151
• Grandchild Inherits 125,000,61 yrs. total
  payout3,465,920
• Total Payout 4,624,288

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Example Continued..

• Under new rules, the beneficiaries can disclaim
  until December 31st in the year after the account
  owner dies. Suppose the spouse and child had
  plenty of assets and disclaimed their portion.
• Grandchild inherits 500,000, paid out over his
  or her life expectancy at 8
• Total Payout 13,863,679