Required Minimum Distributions PenServ Plan Services,

Transcription

1 Required Minimum Distributions PenServ Plan Services,

2 IRS Circular 230 Disclosure This information is provided for educational and informational purposes and is not intended to be used to avoid tax penalties or to render tax or legal advice. The taxpayer should seek advice from an independent tax and/or legal advisor. PenServ Plan Services,

3 Qualified Charitable Distributions Qualified Charitable Distributions were extended on December 17, 2010 for 2010 and 2011 under the Tax Relief, Unemployment Compensation Reauthorization, and Job Creation Act of A QCD may count toward satisfying an RMD No extension for 2012, but Nina Olsen, the Taxpayer Advocate in he June report to Congress, stated that she anticipated some of the expiring tax provisions from 2011 to be extended in 2012 (late) and included QCDs in her comments. PenServ Plan Services,

4 Qualified Charitable Distributions QCDs have been extended until , and the majority of the same rules apply as before. IRA owner (or beneficiary in the case of an Inherited IRA) must be exactly 70½ or older. Maximum amount of tax-free QCD not to exceed $100,000 for each year per eligible taxpayer. Must be paid in the form of a transfer to the qualified charitable organization. Treated as coming from taxable portion of the IRA. Treated toward satisfying RMD. Payer reports as a normal distribution. PenServ Plan Services,

5 Qualified Charitable Distributions Charitable organizations include: churches, religious organizations; federal, state and local governments; nonprofit schools and hospitals; Red Cross; Goodwill; Salvation Army; United Way; War veteran s groups. Only outright gifts are eligible for the exclusion from income. Contributions to supporting organizations, donor-advised funds, charitable gift annuities, charitable remainder trusts, pooled income funds and other split-interest entities do not qualify. PenServ Plan Services,

6 Qualified Charitable Distributions A QCD cannot be made from an ongoing SEP or SIMPLE IRA. If QCD is made from a traditional IRA, the first amounts transferred are deemed coming from the taxable portion this is an exception to the pro rata taxation rules. If QCD is made from a Roth IRA, the first amounts transferred are deemed coming from the earnings portion this is a reverse order of the normal ordering rules. PenServ Plan Services,

7 Qualified Charitable Distributions Taxpayer is not entitled to a tax deduction on personal return because the QCD is tax-free. However, the entire amount of the QCD must still satisfy the requirements to be an otherwise deductible charitable contribution, other than the percentage limitations. QCDs are not subject to any Federal income tax withholding requirements by the payer. QCDs are counted in determining whether an RMD has been satisfied for the year. PenServ Plan Services,

8 Qualified Charitable Distributions Although a QCD must be made directly from the IRA payable to the charity, IRS permits the IRA trustee to deliver the check to the IRA owner who then delivers it to the charity. Taxpayer is responsible for obtaining any substantiation records from the charity. Form 1099-R is issued in name of IRA owner and reports the amount as though an actual distribution was made (Code 7 for traditional IRA; Code T or Q for Roth IRA). Taxpayer follows instructions on Form 1040 to show QCD on tax return, as well as on Form PenServ Plan Services,

9 Qualified Charitable Distributions Failed QCDs: If an amount is transferred to a charity but fails to meet the QCD requirements, the amount is treated as a distribution from the IRA that is includible in gross income under the normal basis recovery rules applicable to the IRA. The amount contributed to the charity is treated as though the taxpayer made the charitable contribution for purposes of determining an income tax deduction. PenServ Plan Services,

10 Code Sections Dealing with RMDs 408(a)(6) for IRAs 408A(c)(5) for Roth IRAs (at death) 401(a)(9) for qualified plans 403(b)(10) for 403(b)s 457(d) for 457s 4974 for the 50% excise tax PenServ Plan Services,

11 Regulation Sections Dealing with RMDs for IRAs 1.408A-6 for Roth IRAs at death 1.401(a)(9)-1 through - 9 for QPs 1.403(b)-3 for 403(b)s for the 50% excise tax PenServ Plan Services,

12 Three Sets of Requirements RMDs While Living RMDs If Death Before Required Beginning Date (RBD) RMDs if Death After Required Beginning Date (RBD) PenServ Plan Services,

13 Effective Date Final Regs Must be Used to Determine RMDs for 2003 and thereafter. For Death Distributions Required in 2003, the Designated Beneficiary Must be Redetermined and the Distribution Period Must be Reconstructed. PenServ Plan Services,

14 RMD Tables Three Sets of Tables: 1. Single Life Expectancy 2. Joint Life Expectancies 3. Uniform Lifetime PenServ Plan Services,

15 Participant is Alive on RBD General Rule: Uniform Lifetime Table Assumes participant has a beneficiary exactly 10 years younger, regardless of whether or not such beneficiary satisfies the definition of designated beneficiary, such as an estate or charity. PenServ Plan Services,

16 Participant is Alive on the RBD Exception: If spouse is the sole beneficiary AND is more than 10 years younger, the true joint life expectancy between the Participant and spouse, redetermined each year, can be used. PenServ Plan Services,

17 Participant Dies Before the RBD General Rule: The 5-Year Rule Entire balance must be distributed no later than the December 31 st of the year containing the 5 th anniversary of the Participant s death. Under the 5-Year Rule, there are no RMDs each year during the 5-year period. Note: Plan default determines whether 5-year rule or life expectancy rule applies. Regulations default to life expectancy rule. PenServ Plan Services,

18 Participant Dies Before the RBD Exception: The Life Expectancy Rule Single life expectancy of the designated beneficiary determined the calendar year following the year of death. Non-spouse beneficiary: must commence distributions (reduced by one year for each year that lapses) no later than the December 31 st following the year of death. Spouse is the sole beneficiary: distributions (redetermined each year) are not required to begin until the December 31 st of the year that the Participant would have attained the age of 70½ had he or she lived, if this date is later than the December 31 st following the year of death. PenServ Plan Services,

19 Participant Dies After the RBD General Rule: If there is a designated beneficiary, death distributions will be calculated using the longer of: the S/L/E of the beneficiary determined the calendar year following the year of death or the S/L/E of the decedent determined in the year of death minus one. If the S/L/E of a non-spouse beneficiary is longer, the S/L/E is determined each year by reducing such life expectancy by one year for each year that lapses thereafter. If the S/L/E of a spouse beneficiary is longer, the S/L/E is determined each year by redetermining the spouse s S/L/E each year. When the spouse beneficiary dies, the remaining S/L/E of the spouse determined in the year of the spouse s death will be reduced by one year thereafter. PenServ Plan Services,

20 Participant Dies After the RBD Exception: If there is no designated beneficiary, death distributions will be calculated using the single life expectancy of the Participant determined in the year of death and then reduced by one year thereafter. PenServ Plan Services,

21 RMDs Before Death Entire Balance Distributed on or Before RBD -Or- RMDS Must Commence on or Before RBD PenServ Plan Services,

22 Required Beginning Date (RBD) The date by which RMDs must commence. PenServ Plan Services,

23 RBD for IRAs April 1st of the Calendar Year Following the Calendar Year In Which the IRA Owner Attains the Age of 70½. PenServ Plan Services,

24 RBD for Qualified Plans More Than 5% Owners: Same as IRA 5% or Less Owners: The April 1st following the later of the year the participant is age 70½, or the year of retirement. During GUST restatements, employer could define same RBD for all employees. Until an employee reaches the statutory RBD, distributions may be eligible rollover distributions unless excepted for another reason. Death distributions are determined on plan s definition of RBD. PenServ Plan Services,

25 RBD for 403(b)s Generally, the April 1st of the Year Following the Later of Age 70½ or Retirement. Special Rules for Determining Account Balance Where Part of the Balance May be Delayed Until Age 75. PenServ Plan Services,

26 Attainment of Age 70½ A participant attains the age of 70½ as of the date that is six calendar months after the participant s 70 th birthday. PenServ Plan Services,

27 Distributions Before a Participant s RBD As a general rule, lifetime distributions made before the participant s RBD for calendar years before the participant s first distribution calendar year (generally the participant s 70½ year) need not satisfy the RMD regulations. PenServ Plan Services,

28 Distribution Calendar Year (DCY) 1st DCY 70½ Year Retirement Year (QPs & 403(b)s) 2nd DCY Year that Contains RBD PenServ Plan Services,

29 Time for Distributions 1st DCY By April 1st of Following Year 2nd DCY and Beyond By December 31st PenServ Plan Services,

30 Account Balance The balance used in determining the current year s RMD. PenServ Plan Services,

31 QP Account Balance LAST VALUATION DATE IN PRIOR YEAR + Contributions between that date and December 31st of that prior year - Distributions between that date and December 31st of the prior year + Outstanding Rollovers or Transfers NO CARRYBACK CONTRIBUTIONS ARE ADDED BACK PenServ Plan Services,

32 403(b) Account Balance Pre-87 Balance FMV 12/31/86 403(b)s Only Post-86 Balance Contributions after 86 + all gains RBD RBD Later of: Later of: 12/31 of year age 75 4/1 after 70½ or or 4/1 after retirement 4/1 after retirement PenServ Plan Services,

33 403(b) Special Rules Issuer or Custodian is responsible for tracking 12/31/86 balance. Distributions that are not RMDs reduce 12/31/86 balance dollar for dollar. 60-Day Rollovers lose 12/31/86 status; transfers to another 403(b) generally preserve 12/31/86 status if tracked. PenServ Plan Services,

34 Uniform Lifetime Table During Lifetime And Including Year of Death GENERAL RULE: Uniform Lifetime Table, Redetermined each year. EXCEPTION: Sole Spouse Beneficiary More Than 10 Years Younger Joint Life Expectancies Redetermined. PenServ Plan Services,

35 Marital Status General Rule: Spouse must be sole beneficiary at all times during the DCY. Exception: If spouse is sole beneficiary on January 1st but there is a change in marital status due to death or divorce, special rules apply. PenServ Plan Services,

36 Uniform Lifetime Table Example Calendar Year Participant s Age Distribution Period (DIES) 18.7* *18.7 STILL USED FOR DCY 2011 PenServ Plan Services,

37 Joint Life Expectancies Example DCY Craig s Age Brenda s Age Joint Life (dies) * *40.1 still used for DCY 2014 because Craig is treated as alive all year. PenServ Plan Services,

38 What If Brenda Dies First? DCY Craig s Age Brenda s Age Joint Life (dies) 40.1 * Since Brenda was sole beneficiary as of January 1, 2014, Craig s RMD for 2014 is still calculated using However, Craig s RMD for 2015 is based on Uniform Lifetime Table using age 75 of PenServ Plan Services,

39 What if Divorced? IRS has verbally stated that if participant affirmatively elects another beneficiary after a divorce, uniform lifetime table must be used that year. However, if beneficiary changes merely due to an operation of law (beneficiary designation becomes null & void), joint life can be used that year. Safest answer: use uniform table year of divorce. PenServ Plan Services,

40 Taking More Than Minimum Can always withdraw more. Does not lock person into larger amounts (except for annuitized contracts). Does not reduce future RMDs. PenServ Plan Services,

41 Taking Less Than RMD 50% excise tax applies on the shortfall. Taxpayer files Form 5329 and pays tax. Is not required to withdraw missed payments if 50% excise tax paid. Special rules apply IF taxpayer wants to get 50% tax waived. Same rules apply to a beneficiary who fails to take RMD. PenServ Plan Services,

42 Filing for Waiver of 50% Tax Taxpayer must show that any shortfall was due to reasonable error and what steps are being taken to remedy the shortfall. Taxpayer must attach an explanatory statement and file Form 5329 as follows: Complete lines 50 and 51 as instructed. Enter RC and amount to be waived on dotted line next to line 52 and enter difference on line 52. Complete line 53 as instructed. Taxpayer will receive a response from IRS. PenServ Plan Services,

43 RMDs and Basis Any portion of the distribution that is nontaxable due to the basis recovery calculations count toward satisfying the RMD amount. For example, the RMD amount is $10,000. The participant withdraws $10,000. After the basis recovery calculation is done, only $8,000 represents the taxable amount of the distribution. However, the RMD is satisfied. PenServ Plan Services,

44 Amounts Not Counted as RMD QPs: any corrective distributions; defaulted loans; dividends paid on employer securities; costs of life insurance protection. IRAs: any return of excess; corrective distributions of SEP/SARSEP excesses; corrective distributions of SIMPLE IRA excesses. PenServ Plan Services,

45 Participating in More Than One Plan Q. Can a participant satisfy RMDs by taking amounts from other plans? A. It depends. PenServ Plan Services,

46 Qualified Plans Each qualified plan must distribute its own RMD, or plan fails 401(a)(9). Taking more from one qualified plan does not reduce RMD required to be distributed from another plan. PenServ Plan Services,

47 Aggregation Rule for IRAs And 403(b)s RMDs must be determined separately. Total RMD can be taken from any IRA held in same capacity. Beneficiary can only aggregate RMDs inherited from same decedent. Roth IRA beneficiary can only aggregate Roth IRAs from same decedent. RMDs from IRAs and 403(b)s are separate. PenServ Plan Services,

48 Aggregation Rule With Annuity Products IRS Clarification: Aggregation applies as long as annuity has not yet been annuitized ( 1.401(a)(9)-6, A12). The annuity is treated as any other investment, except that the value of the contract may be increased for additional benefits provided under the annuity. If an IRA or participant in an employer s plan transfers a portion during a DCY to an annuity, the remaining amount in the Plan is used to calculate the RMD from the Plan. The amount transferred to the Annuity that is annuitized must separately satisfy 401(a)(9) and 1.401(a)(9)-6 of the regulations. PenServ Plan Services,

49 Rollovers and Transfers Between 403(b)s Follows IRA rules PenServ Plan Services,

50 Rollovers and Transfers Between QPs and 457(b)s RMD cannot be rolled over or transferred to another plan. If transferred, transferor plan must hold back RMD and distribute. PenServ Plan Services,

51 Rollovers and Transfers From QP, 403(b) or 457(b) to IRA RMD cannot be rolled over or direct rolled over to an IRA. RMD must be distributed from the employer s plan. If RMD is included in the direct rollover, it is treated as a regular IRA contribution, and thus could be an excess. Employer s plan must issue R s: one for the eligible portion of the direct rollover and one for the RMD that should have been distributed prior to the direct rollover of the remaining amount. PenServ Plan Services,

52 Designated Beneficiary Must be an individual. Must be named as beneficiary by participant or by terms of the plan. Designated beneficiary determines distribution period after participant s death. A Non-Individual (Estate, Charity) cannot be a Designated beneficiary but could be a Named beneficiary. PenServ Plan Services,

53 No Designated Beneficiary What does it mean when there is no designated beneficiary? Uniform Lifetime Table used while the participant is alive. 5-year rule used if participant dies before RBD. Single life expectancy of deceased participant used if participant dies after RBD. PenServ Plan Services,

54 Beneficiary Determination Date Between date of death and 9/30 of the following year, beneficiaries can be eliminated by distribution or disclaimer, but not changed. On 9/30 of the following year, remaining beneficiaries determine whether there is a designated beneficiary. Between that 9/30 date and 12/31, separate beneficiary accounts can be established. If a beneficiary dies between participant s death and following 9/30, that beneficiary is still treated as a beneficiary, even if a subsequent beneficiary is entitled to the money. PenServ Plan Services,

55 Multiple Beneficiaries General Rule: If all beneficiaries are individuals, the life expectancy of the oldest is used. If one of the beneficiaries is a non-individual, participant treated as not having a designated beneficiary. Special rules apply if separate accounts are timely established. PenServ Plan Services,

56 Contingent Beneficiaries Can ignore if the contingency is only upon death of primary beneficiary. Cannot ignore if the contingency is upon another stated event (such as reaching a certain age). PenServ Plan Services,

57 Trust as Beneficiary General Rule: A trust is a non-individual and participant is treated as not having a designated beneficiary. Various reasons why someone would want to name a trust as beneficiary of a retirement account. Many trusts are set up to avoid some or all of the person s estate tax liability. PenServ Plan Services,

58 Trust as Beneficiary A Few Types of Trusts are: Bypass Trust Credit Shelter Trust Marital Deduction Trust Living Trust Testamentary Trust Qualified Terminal Interest Property Trust (QTIP) PenServ Plan Services,

59 Trust as Beneficiary The RMD rules govern the income taxation of retirement plan distributions even if a Trust is the beneficiary. General rule: trust as beneficiary treated as not having a designated beneficiary. Exception: look through trust. PenServ Plan Services,

60 Trust As Designated Beneficiary Look Through Trust Requirements: Valid under state law. Irrevocable, or by its terms becomes irrevocable at death. Beneficiaries are identifiable. Documentation provided to plan. PenServ Plan Services,

61 Trust Documentation Certification (form or letter) from Trustee of the Trust; or a copy of the Trust instrument. Must be provided to Plan no later than October 31st of year following the year of death. PenServ Plan Services,

62 Look Through Trust Look through to underlying beneficiaries of the Trust merely to determine distribution period after death. Separate account rules do NOT apply to multiple beneficiaries under the Trust. PenServ Plan Services,

63 Trust as Beneficiary Payments are made to the trust - Not directly to beneficiaries of trust. If multiple trust beneficiaries, single life of oldest is used to determine distribution period. Separate Trust beneficiary accounts okay but S/L/E of oldest used on all accounts. No automatic rollover by spouse (only through private letter ruling). PenServ Plan Services,

64 Trust Beneficiary Reporting on Form 1099-R is in name and EIN of the Trust, not the social security number of the beneficiary of the trust. The trustee of the trust is responsible for administering the terms of the trust. PenServ Plan Services,

65 Trust Beneficiary Payments to trust as beneficiary will satisfy 401(a)(9) if paid in accordance with RMD rules. Trust is not required to immediately distribute to trust beneficiaries. Terms of trust dictate when trust assets can be paid to trust beneficiaries. PenServ Plan Services,

66 Termination of Trust If Trust terminates, the inherited account can be retitled in individual s name as beneficiary of the original participant. However, the distribution period applicable to the Trust Beneficiary Account continues to apply to all. PenServ Plan Services,

67 Estate as Beneficiary Can never be treated as designated beneficiary. Uniform Table while living; 5-year rule or S/L/E of participant after death depending upon when participant died. No look through estate provisions in regulations. No separate account rules. PenServ Plan Services,

68 Estate Terminates or Small Estates If Estate terminates: Inherited account can be retitled in name of the estate s heirs as beneficiary of the participant. However, original distribution period still applies! Small Estates: Most States have small estate laws that may permit heirs of estate to set up Inherited IRAs in their own name. However, original distribution period still applies! PenServ Plan Services,

69 Definition of Spouse 1.401(a)(9)-8, Q&A 5 says... in general, state law governs. Defense of Marriage Act says... for any Federal tax purpose, marriage means one man married to one woman. PenServ Plan Services,

70 Death of Participant Before RBD General Rule: Default Rule: 5 Year Rule Life Expectancy Rule: Single Life of Beneficiary Commencement date: Non-spouse - by next 12/31 Spouse sole beneficiary by 12/31 when participant would have attained age 70½ PenServ Plan Services,

71 Multiple Beneficiaries Separate Account Rules Separate Accounts may be established at any time. If established by 12/31 of the year following year of death: S/L/E of each beneficiary used in year following death. If established after 12/31 of the year following year of death: S/L/E of oldest beneficiary applies to all separate accounts for all years. PenServ Plan Services,

72 Default Rule If participant dies before RBD and has a designated beneficiary, the life expectancy rule automatically applies, unless plan defaults to the 5-year rule (or beneficiary elects 5-year rule). PenServ Plan Services,

73 Participant Dies Before RBD Spouse Dies After Participant But Before Distributions Required to Commence Spouse Steps into Shoes of Participant. 5 Year Rule and Life Expectancy Rule Start Over for original spouse s Subsequent Beneficiaries. This is the only time you look at subsequent beneficiaries in determining the distribution period because subsequent beneficiaries step into the shoes of being the primary beneficiaries. Special Rule for New Spouse of original spouse treated as nonspouse. PenServ Plan Services,

74 Subsequent Beneficiaries Also called Successor Beneficiary. Spouse has always been permitted. Most plans permit Non-Spouse to name a subsequent beneficiary. When original beneficiary dies, funds continue to subsequent beneficiary, but no change in distribution period. Except for the stepping into the shoes rule, life expectancy of a subsequent beneficiary is never used!! PenServ Plan Services,

75 Participant Dies Before RBD Spouse Dies After Participant and After Distributions Required to Commence Before Spouse Dies Single Life of Spouse Redetermined each year. After Spouse Dies Single life of Spouse reduced by one even if subsequent beneficiaries entitled to money. PenServ Plan Services,

76 Participant Dies Before RBD - Non-Spouse Beneficiary Dies After Participant Non-spouse beneficiary s single life reduced by one while living. When non-spouse beneficiary dies, single life of original beneficiary, reduced by one continues to subsequent beneficiary. PenServ Plan Services,

77 Participant Dies After RBD With a Designated Beneficiary RMD for year of death as if participant is alive. RMD for years following year of death, longer of: S/L/E of beneficiary year after death; or S/L/E of deceased participant year of death reduced by one. PenServ Plan Services,

78 RMD for Year of Death As if participant were alive all year. Any undistributed RMD must be distributed to beneficiary under plan (not to participant s estate). If surviving spouse wants to roll to own IRA, yearof-death undistributed RMD is not permitted to be assumed by spouse. PenServ Plan Services,

79 Participant Dies After RBD With a Designated Beneficiary If S/L/E of Beneficiary is longer: Non-spouse: use S/L/E year following death and reduce by one each year thereafter. Spouse: use S/L/E year following death and redetermine each year. when spouse dies, use S/L/E year spouse dies and reduce by one each year thereafter. PenServ Plan Services,

80 Participant Dies After RBD With a Designated Beneficiary If S/L/E of deceased participant is longer: Use S/L/E of deceased year of death and reduce by one year thereafter. IRS verbally says that if beneficiary is spouse, a switch to redetermined S/L/E of spouse OK when it becomes longer than deceased S/L/E being reduced by one. Financial institution is not required to monitor this! PenServ Plan Services,

81 Participant Dies After RBD Without a Designated Beneficiary RMD for year of death as if participant is alive. RMD for years following death, S/L/E of deceased participant year of death, reduced by one year thereafter. PenServ Plan Services,

82 Look Through Trust with Multiple Beneficiaries If participant dies on or after RBD, use longer of: S/L/E of the participant year of death minus one; or S/L/E of the oldest trust beneficiary year after death. PenServ Plan Services,

83 Primary vs. Contingent General rule: Contingent beneficiary doesn t come into play unless all primaries have predeceased the participant. Caution: If participant and primary beneficiary die simultaneously (or close together), state law may govern which person is deemed to die first. Could be the participant s estate or the primary beneficiary s estate. No distribution should be made until a legal determination is made!! PenServ Plan Services,

84 Beneficiary 60-Day Rollovers, Direct Rollovers and Transfers PenServ Plan Services,

85 Non-Spouse Beneficiary No 60-Day Rollover ever. Possible transfer between like IRAs, if permitted by trustee or custodian (inherited to inherited). Confusion with some insurance companies with an IRA Annuity who refuse to do beneficiary transfers. Direct Rollover option from an employer s plan to an Inherited IRA required. Qualified Rollover Contributions to an inherited Roth IRA possible discussed later. PenServ Plan Services,

86 Nonspouse Beneficiary Direct Rollovers Effective for eligible rollover distributions after December 31, Date of employee s death is irrelevant. Provision was meant to enable nonspouse beneficiaries to use a life expectancy payout when the employer s plan forces a total distribution. Effective for eligible rollover distributions being made in 2010, employer plans are required to offer direct rollover option to nonspouse beneficiary. PenServ Plan Services,

87 Nonspouse Beneficiary Direct Rollovers General Rules: Must be a direct rollover no 60-day rollover. IRA must be an Inherited IRA and styled Tom Smith as beneficiary of John Smith. If Designated Roth Account under 401(k) or 403(b), direct rollover to Inherited Roth IRA. All other funds, to Inherited Traditional IRA to avoid taxation. If rollover converted to an inherited Roth IRA, funds are taxable. PenServ Plan Services,

88 Nonspouse Beneficiary Direct Rollovers General Rules: Must be a designated beneficiary (this includes a look-through trust with the inherited IRA styled in the name of Trust as beneficiary of the Decedent ). If multiple designated beneficiaries, separate account rules apply if timely established. Any RMDs applicable to distributing plan not permitted to be part of the direct rollover. Types of employer plans: qualified plans, 403(b) plan, governmental 457(b) plans. PenServ Plan Services,

89 Nonspouse Beneficiary Direct Rollovers Step 1: Employer s plan must offer a direct rollover option. Step 2: If direct rollover, how much can be direct rolled? Step 3: After the direct rollover into an inherited IRA, what is the distribution period applicable to the inherited IRA? PenServ Plan Services,

90 Step 1: Employer s Plan Must Permit Direct Rollover Election Prior to 2010, employer s plan was not required to offer this option to a nonspouse beneficiary. Prior to 2010, if the employer s plan offered direct rollovers to nonspouse beneficiaries of some but not all deceased participants, such direct rollover elections must have been offered on a nondiscriminatory basis. The right to make a direct rollover election is a benefit, right or feature that is subject to the general nondiscrimination rules of 401(a)(4). PenServ Plan Services,

91 Step 1: Employer s Plan Must Permit the Direct Rollover Election Plan needed to be amended within the remedial amendment period applicable to the PPA. In the case of a terminated defined contribution plan, the Plan will be considered to offer nonspouse beneficiary direct rollovers without regard to the terms of the Plan. Under DOL regulations, in the case of a missing nonspouse beneficiary, the Plan must directly roll into an inherited IRA in the same manner as under the automatic direct rollover requirements. PenServ Plan Services,

92 Step 1: Employer s Plan Must Permit the Direct Rollover Election Beginning in 2010, an employer s plan must offer a direct rollover option to a nonspouse beneficiary. Failure to comply could disqualify the entire employer s plan. If the nonspouse beneficiary doesn t elect a direct rollover, the mandatory 20% withholding applies to the distribution since a direct rollover could have been made. If an actual distribution is made to a nonspouse, NO 60-DAY ROLLOVER IS PERMITTED!! PenServ Plan Services,

93 Step 2: How Much Can be Direct Rolled? Amount eligible to direct roll depends upon: Whether the participant died before or after the RBD; and What death distribution provisions were applicable to the employer s plan. PenServ Plan Services,

94 Step 2: How Much Can be Direct Rolled? Plan default provision for death before RBD: No plan provision life expectancy rule applies. (This also applies if plan forces an immediate distribution after death.) Plan could require that the 5-year rule applies. Plan could permit beneficiary to elect on an individual basis whether 5-year rule or life expectancy rule applies. PenServ Plan Services,

95 Step 2: How Much Can be Direct Rolled? Participant dies before RBD: No amount is an RMD the year of death. If employer s plan defaults to 5-year rule, no amount is an RMD until the 5th year following year of death. In this case, the entire amount can be direct rolled on or before the end of the 4th year following year of death. Beginning in 5th year, nothing can be rolled because the entire balance is the RMD. PenServ Plan Services,

96 Step 2: How Much Can be Direct Rolled? Special First Year Rule if 5-year rule applies: Nonspouse beneficiary may determine the RMD under the employer s plan (and thus the amount not eligible to direct roll) using the life expectancy rule, but only if the direct rollover occurs prior to the end of the year following the year of death. If direct rollover occurs same year as year of death, entire balance can be direct rolled. If direct rollover occurs year following year of death, the RMD based on the nonspouse beneficiary s life expectancy cannot be direct rolled. PenServ Plan Services,

97 Step 2: How Much Can be Direct Rolled? If plan defaults to the life expectancy rule: Beginning the year following the year of death, the RMD is determined using the life expectancy of the nonspouse beneficiary. Amount not eligible for direct rollover includes all undistributed RMDs for all years. PenServ Plan Services,

98 Step 2: How Much Can be Direct Rolled? Participant dies after RBD: If nonspouse direct rolls the same year of death, any undistributed year-of-death RMD not eligible to direct roll. If direct rollover occurs in following year (or any subsequent year), the amount not eligible to direct roll is determined by using the longer of rule. RMDs for year of direct rollover and all prior years cannot be direct rolled. PenServ Plan Services,

99 Step 3: What is the Distribution Period for the Inherited IRA? Depends upon whether the participant died before or after RBD; and Employer s plan provision regarding the 5-year rule or life expectancy rule if the participant dies before his or her RBD (explained earlier). PenServ Plan Services,

100 Step 3: What is the Distribution Period for the Inherited IRA? Participant dies before RBD and Plan defaulted to 5- year rule: General Rule: Inherited IRA also subject to 5-year rule. First Year Rule Exception: If direct rollover occurs before the end of the year following year of death, the Inherited IRA can use the life expectancy rule, unless IRA document automatically defaults to the 5-year rule. PenServ Plan Services,

101 Step 3: What is the Distribution Period for the Inherited IRA? Participant dies before RBD and Plan defaults to life expectancy rule: Inherited IRA subject to life expectancy rule, unless IRA document automatically defaults to the 5-year rule. PenServ Plan Services,

102 Step 3: What is the Distribution Period for the Inherited IRA? Participant dies after RBD: The distribution period applicable to the Inherited IRA is the same that would have applied under the employer s plan had the direct rollover not occurred. The distribution period in this case is the longer of the remaining life expectancy of the decedent or the life expectancy of the nonspouse beneficiary. PenServ Plan Services,

103 Spouse Beneficiary PenServ Plan Services,

104 Spouse Beneficiary From QP, 403(b) or 457(b) to IRA: RMDs cannot be rolled over, including year of death RMD, if any, or any intervening year between death and year of rollover. Spouse can direct roll or 60-day roll into an IRA as own IRA (or as an inherited IRA if permitted by IRA Trustee). PenServ Plan Services,

105 Spouse Beneficiary From QP, 403(b) or 457(b) to IRA: To be nontaxable, accounts under the Plan (other than designated Roth account) roll to traditional IRA. Designated Roth account rolls to Roth IRA. See QRCs, later. PenServ Plan Services,

106 Spouse Beneficiary From decedent spouse s IRA: If spouse is sole beneficiary, can either: Treat the IRA as his or her own IRA; Or Treat the IRA as an inherited IRA. PenServ Plan Services,

107 Spouse Beneficiary If Surviving Spouse NOT Sole Beneficiary: Can withdraw their portion and roll over to own IRA within 60 days; or after separate beneficiary account is timely established, treat as own IRA. PenServ Plan Services,

108 Spouse Beneficiary If spouse beneficiary rolls into own IRA the same year of death, spouse is not subject to an RMD that year as the owner, even if over age 70½. Can roll over or treat as own IRA the entire balance, except for any year-of-death RMDs applicable to the deceased spouse to the extent not distributed prior to IRA owner s death. PenServ Plan Services,

109 Spouse Beneficiary is Over Age 70½ If the spouse treats the decedent s IRA as his or her own IRA (or rolls from an employer s plan into own IRA) the following year, spouse is treated as owner of the IRA all year and not as a beneficiary. Thus, no death RMD. However, if spouse is 70½ and therefore subject to RMDs as an owner, include amount rolled over as though it were part of the balance on prior December 31st (this is not in the regulations, but IRS clarified verbally that this was their intent). PenServ Plan Services,

110 Qualified Rollover Contributions (QRCs) to a Roth IRA PenServ Plan Services,

111 QRCs to a Roth IRA Prior to 2008, Roth IRAs could accept rollovers only from: Another Roth IRA; A conversion from a traditional IRA; or A rollover from a designated Roth account under an employer s 401(k) or 403(b) plan. PenServ Plan Services,

112 QRCs to a Roth IRA Beginning in 2008, QRCs to a Roth IRA also include rollovers from: Any qualified plan (not just designated Roth accounts); A 403(b) plan; or A governmental 457(b) plan. QRCs to a Roth IRA from amounts other than designated Roth accounts are subject to the Roth IRA conversion rules PenServ Plan Services,

113 QRCs by Beneficiaries Permits a spouse or nonspouse beneficiary to roll from the employer s plan to a Roth IRA, subject to the conversion rules. (If nonspouse, direct rollover only.) Amount direct rolled to an inherited Roth IRA is taxable. Referred to as rollover conversions or direct conversions. PenServ Plan Services,

114 Spouse Beneficiary QRCs Spouse beneficiary can choose to treat the Roth IRA as either: His or her own Roth IRA (and delay RMDs); or An inherited Roth IRA (subject to the RMD rules as a beneficiary). Subject to same rules as a nonspouse under Notice in determining distribution period applicable to the inherited Roth IRA. PenServ Plan Services,

115 Nonspouse Beneficiary QRCs Nonspouse beneficiary must treat the Roth IRA only as an inherited Roth IRA. PenServ Plan Services,

116 Recharacterizations A QRC rollover conversion to a Roth IRA can be timely recharacterized to a traditional IRA, even if the beneficiary was eligible to have made the rollover conversion. If recharacterized, the taxable portion of the plan distribution is not taxable. The traditional IRA is styled exactly as the Roth IRA prior to the recharacterization. PenServ Plan Services,

117 Conversions If nonspouse direct rolls to an inherited traditional IRA, cannot convert to an inherited Roth IRA. If spouse rolls to an inherited traditional IRA, spouse can convert to an inherited Roth IRA. PenServ Plan Services,

118 Unrecovered Basis at Death QP: Remaining basis recovered on final tax return filed on behalf of decedent. Traditional IRA: Beneficiary continues pro-rata recovery and files Form Roth IRA: Beneficiary recovers basis first in accordance with ordering rules and files Form If qualified distribution, -0- is taxable and does not file Form PenServ Plan Services,

119 50% Excise Tax 50% excise tax applies to beneficiary for RMD shortfall. Tax paid by beneficiary. Automatic Waiver for a beneficiary where participant died before RBD and beneficiary is subject to the L/E rule: no 50% if entire balance withdrawn within 5 years. PenServ Plan Services,

120 Beneficiary Designations General Rule: If a primary beneficiary predeceases the participant, the remaining primary(ies) equally share in the deceased beneficiary s portion. Randy Amy 50% Mark 50% If Amy dies before Randy, Mark becomes the 100% primary beneficiary. PenServ Plan Services,

121 Per Stirpes Designations Randy Amy 50% Mark 50% If Amy dies before Randy, Amy s 50% is divided between Amy s children and Mark would remain entitled to 50% of Randy s balance when Randy dies. Justin % Mark 50% Jacey % Jenna % PenServ Plan Services,

122 Per Stirpes Designations Randy Amy 50% Mark 50% If Amy and Mark both predecease Randy, Amy s 50% is divided between Amy s children and Mark s 50% is divided between Mark s children when Randy dies. Justin % Alyssa 25% Jacey % Preston 25% Jenna % PenServ Plan Services,

123 Per Capita Designations Randy Amy 50% Mark 50% If Amy dies before Randy, Amy s children become equal beneficiaries with Mark when Randy dies: Justin 25% Mark 25% Jacey Jenna 25% 25% PenServ Plan Services,

124 Per Capita Designations Randy Amy 50% Mark 50% If Amy and Mark both predecease Randy, Amy s children become equal beneficiaries with Mark s children when Randy dies: Justin 20% Alyssa 20% Jacey 20% Preston 20% Jenna 20% PenServ Plan Services,

125 Qualified Disclaimers Governed Under Section 2518 Must Be Irrevocable Must be in Writing and Delivered to Person in Possession of Property Must Take Place Within 9 Months of Date of Death PenServ Plan Services,

126 Partial Disclaimers Revenue Ruling clarifies that a beneficiary can disclaim a portion, even if the beneficiary has already received an RMD, if all other requirements are met. However, the income attributable to the RMD that the beneficiary received cannot be disclaimed. PenServ Plan Services,

127 BENEFICIARY ROLLOVER FROM AN EMPLOYER S PLAN TO AN INHERITED IRA (Use for either an Inherited Traditional IRA or an Inherited Roth IRA) DISTRIBUTING PLAN INFORMATION Name of Distributing Plan: Type of Plan: Plan Provisions: Qualified Plan (other than a Designated Roth Contribution Account) to an Inherited Traditional IRA Qualified Plan Designated Roth Contribution Account to an Inherited Roth IRA Qualified Plan (other than a Designated Roth Contribution Account) converted to an Inherited Roth IRA 403(b) Plan (other than a Designated Roth Contribution Account) to an Inherited Traditional IRA 403(b) Plan Designated Roth Contribution Account to an Inherited Roth IRA 403(b) Plan (other than a Designated Roth Contribution Account) converted to an Inherited Roth IRA 457(b) Governmental Plan (other than a Designated Roth Contribution Account) to an Inherited Traditional IRA 457(b) Plan Designated Roth Contribution Account to an Inherited Roth IRA 457(b) Governmental Plan (other than a Designated Roth Contribution Account) converted to an Inherited Roth IRA Federal Employee s Thrift Savings Plan (other than a Designated Roth Contribution Account) to an Inherited Traditional IRA Federal Employee s Thrift Savings Plan Designated Roth Contribution Account to an Inherited Roth IRA Federal Employee s Thrift Savings Plan (other than a Designated Roth Contribution Account) converted to an Inherited Roth IRA Participant died before RBD and the 5-year rule applied. Participant died before RBD and the life expectancy rule applied. Participant died after RBD and the deceased participant s remaining life expectancy applied. Participant died after RBD and the beneficiary s life expectancy applied. Copyright , PenServ Plan Services, Inc. Control 05012A.doc (dual) (8-12) (8-12) DECEASED PARTICIPANT AND BENEFICIARY INFORMATION Name of Deceased Participant: Date of Death: Spouse Name of Individual Beneficiary: Nonspouse SSN: Birth date: Name of Look-Through Trust Beneficiary: EIN: Name of Trustee of the Look-Through Trust: Phone: Beneficiary s Residence Address: Phone: 1. Direct rollover is payable as follows: RECEIVING PLAN INFORMATION as the Custodian Trustee for Name of Accepting Organization Traditional Inherited IRA Roth Inherited IRA Beneficiary s Name and Account Number 2. Amount of Direct Rollover: In Cash: $ ; In Kind. Specify: 3. Delivery instructions: 4. Styling of the Inherited IRA: as beneficiary of Name of Beneficiary Name of Deceased Participant 5. If DTC eligible, DTC #: BENEFICIARY CERTIFICATION AND SIGNATURE I hereby certify that the following statements are true and correct: 1. I am the beneficiary of the above-named deceased plan participant and I am eligible to roll the assets as described above into an Inherited IRA as designated above. 2. I understand that this IRA is an Inherited IRA, that the rollover must be completed as a direct rollover if I am not the spouse, that I must satisfy the required minimum distributions in the manner identified above, and that I cannot make my own additional contributions to this Inherited IRA. 3. I certify that this rollover is an eligible rollover distribution and does not include any required minimum distributions with respect to the distributing employer s plan. 4. I am solely responsible for determining and withdrawing the amount of each year s required minimum applicable to the Inherited IRA and I understand that the IRA Custodian or Trustee will report the distributions to the Internal Revenue Service. 5. I acknowledge that, due to the complexities involved in the tax treatment of eligible rollover distributions and excise taxes applicable to the failure to satisfy required minimum distributions, the Custodian/Trustee has recommended that I consult with my tax advisor or the Internal Revenue Service before completing this rollover. 6. I hereby release the Custodian/Trustee from any claim for damages on account of the failure of this transaction to qualify as a valid beneficiary direct rollover or for any income tax or excise tax penalties that may arise. Signature of Beneficiary: Date:

128 Department of the Treasury Internal Revenue Service Publication 590 Cat. No X Individual Retirement Arrangements (IRAs) For use in preparing 2011 Returns Contents What s New for What s New for Reminders Introduction Traditional IRAs Who Can Open a Traditional IRA? When Can a Traditional IRA Be Opened? How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? What if You Inherit an IRA? Can You Move Retirement Plan Assets? When Can You Withdraw or Use Assets? When Must You Withdraw Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAs What Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? Must You Withdraw or Use Assets? Savings Incentive Match Plans for Employees (SIMPLE) What Is a SIMPLE Plan? How Are Contributions Made? How Much Can Be Contributed on Your Behalf? When Can You Withdraw or Use Assets? Disaster-Related Relief Tax Relief for Kansas Disaster Area Tax Relief for Midwestern Disaster Areas Retirement Savings Contributions Credit (Saver s Credit) How To Get Tax Help Get forms and other information faster and easier by: Internet IRS.gov Appendices Appendix A. Summary Record of Traditional IRA(s) for 2011 and Worksheet for Determining Required Minimum Distributions Appendix B. Worksheets for Social Security Recipients Who Contribute to a Traditional IRA Appendix C. Life Expectancy Tables Table I (Single Life Expectancy) Table II (Joint Life and Last Survivor Expectancy) Table III (Uniform Lifetime) Index Dec 16, 2011

129 What s New for 2011 Due date for contributions and withdrawals. Contribu- Future developments. The IRS has created a page on IRS.gov for information about Publication 590, at gov/pub590. Information about any future developments affecting Publication 590 (such as legislation enacted after we release it) will be posted on that page. tions can be made to your IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. Because April 15, 2012, What s New for 2012 falls on a Sunday and Emancipation Day, a legal holiday in Modified AGI limit for traditional IRA contributions increased. For 2012, if you are covered by a retirement plan at work, your deduction for contributions to a tradi- tional IRA is reduced (phased out) if your modified AGI is: More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er), More than $58,000 but less than $68,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. the District of Columbia, falls on Monday, April 16, 2012, the due date for making contributions for 2011 to your IRA is April 17, See When Can Contributions Be Made? in chapter 1. There is a 6% excise tax on excess contributions not withdrawn by the due date (including extensions) for your return. You will not have to pay the 6% tax if any 2011 excess contributions are withdrawn by April 17, 2012 (including extensions). See Excess Contributions under What Acts Result in Penalties or Additional Taxes? in chapter 1. If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $169,000 but less than $179,000. If your modified AGI is $179,000 or more, you cannot take a deduction for contributions to a traditional IRA. See How Much Can You Deduct? in chapter 1. Modified AGI limit for traditional IRA contributions increased. For 2011, if you were covered by a retirement plan at work, your deduction for contributions to a tradi- tional IRA is reduced (phased out) if your modified AGI is: More than $90,000 but less than $110,000 for a married couple filing a joint return or a qualifying widow(er), More than $56,000 but less than $66,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $173,000 but less than $183,000. If your modified AGI is $183,000 or more, you cannot take a deduction for contributions to a traditional IRA. Modified AGI limit for Roth IRA contributions in- creased. For 2011, your Roth IRA contribution limit is reduced (phased out) in the following situations. Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $169,000. You cannot make a Roth IRA contribution if your modified AGI is $179,000 or more. Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2011 and your modified Reminders AGI is at least $107,000. You cannot make a Roth IRA contribution if your modified AGI is $122,000 or 2010 conversions and rollovers to Roth IRAs. If you more. converted or rolled over amounts to your Roth IRAs in Your filing status is married filing separately, you 2010 and did not elect to include the entire amount in lived with your spouse at any time during the year, income in 2010, you must include part of the amount in and your modified AGI is more than -0-. You cannot income in For information on reporting a 2010 rollo- make a Roth IRA contribution if your modified AGI is ver from a qualified retirement plan to a Roth IRA, see Publication 575. For information on reporting a 2010 con- $10,000 or more. version from a traditional IRA to a Roth IRA, see How to See Can You Contribute to a Roth IRA? in chapter 2. treat 2010 conversions to Roth IRAs in chapter 2. Modified AGI limit for Roth IRA contributions increased. For 2012, your Roth IRA contribution limit is reduced (phased out) in the following situations. Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $173,000. You cannot make a Roth IRA contribution if your modified AGI is $183,000 or more. Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2012 and your modified AGI is at least $110,000. You cannot make a Roth IRA contribution if your modified AGI is $125,000 or more. Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Page 2 Publication 590 (2011)