Taking Money Out of Retirement Plans Twila Slesnick, PhD, Enrolled Agent John C. Suttle, CPA, Attorney
Chapter 1 Types of Retirement Plans... 1 Learning Objectives... 1 Introduction... 1 Qualified Plans... 3 Profit-Sharing Plans... 3 Stock Bonus Plans... 5 Money Purchase Pension Plans... 5 Employee Stock Ownership Plans (ESOPs)... 5 Defined Benefit Plans... 5 Target Benefit Plans... 6 Plans for Self-Employed People (Keoghs)... 6 Individual Retirement Accounts... 6 Traditional Contributory IRAs... 7 Rollover IRAs... 7 Simplified Employee Pensions... 7 SIMPLE IRAs... 8 Roth IRAs... 9 Almost-Qualified Plans... 9 Qualified Annuity Plans... 9 Tax-Deferred Annuities... 9 Nonqualified Plans... 10 Review Questions... 12 Review Answers... 14 Chapter 2 An Overview of Tax Rules... 16 Learning Objectives... 16 Introduction... 16 Taxation Fundamentals... 16 Defer the Payment of Tax... 16 Pay Tax at the Lowest Rate... 19 Avoid Tax Penalties... 19 General Income Tax Rules for Retirement Plans... 20 Distributions Are Taxable Immediately... 20 Your Basis Is Not Taxable... 20 You Don t Have to Withdraw Cash... 22 You May Not Claim Losses... 22 Divorce or Inheritance Doesn t Change the Basic Tax Rules... 23 Income Tax on Qualified Plans and Qualified Annuities... 23 Options for Paying Taxes at Retirement... 23 Options for Paying Taxes Before Retirement... 30 Options for Paying Taxes on Inherited Plans... 31 Options for Paying Taxes on Qualified Plans Received at Divorce... 33 Withholding Money to Pay Taxes... 34 Loans From Qualified Plans... 37 Hardship Distributions From Qualified Plans... 38 Special Income Tax Rules for Tax-Deferred Annuities... 39 Special Income Tax Rules for IRAs... 39 Ordinary Income Tax Applies... 39 Rollover Allowed... 39 Averaging and Capital Gain Treatment Not Allowed... 41 Special Rules at Divorce or Separation... 41 Mandatory Withholding Doesn t Apply... 42
Loans Not Allowed... 42 Hardship Distributions Not Allowed... 42 How Penalties Can Guide Planning... 42 Review Questions... 45 Review Answers... 47 Chapter 3 Early Distributions: Taking Your Money Out Before the Law Allows... 49 Learning Objectives... 49 Introduction... 49 Exceptions to the Early Distribution Tax... 49 Age 59½... 50 Death... 50 Disability... 51 Substantially Equal Periodic Payments... 51 Leaving Your Job After Age 55... 52 Dividends From ESOPs... 52 Medical Expenses... 52 QDRO Payments... 53 Federal Tax Levy... 54 Refunds... 54 Calculating the Tax... 54 Reporting the Tax... 54 Special Rules for IRAs... 60 Rules Applicable to All IRAs Except Roth IRAs... 60 One Rule Applicable Only to SIMPLE IRAs... 63 Review Questions... 64 Review Answers... 65 Chapter 4 Substantially Equal Periodic Payments... 67 Learning Objectives... 67 Introduction... 67 Computing Periodic Payments... 68 Method One: Required Minimum Distribution... 69 Method Two: Fixed Amortization... 71 Method Three: Fixed Annuitization... 72 Implementing and Reporting Your Decision... 74 Modifying the Payments... 76 The No-Modification Rule... 76 Exceptions to the No-Modification Rule... 76 Penalties for Breaking the No-Modification Rule... 77 Review Questions... 79 Review Answers... 80 Chapter 5 Required Distributions: Taking Money Out When You Have To... 82 Learning Objectives... 82 Introduction... 82 Required Distributions During Your Lifetime... 83 Death Before Required Beginning Date... 83 Death After Required Beginning Date... 84 Special Rules for Tax-Deferred Annuities... 85 Special Rules for Roth IRAs... 86 Penalty... 86 Innocent Blunders... 86 Chronic Errors... 87
Ineligible Rollovers... 87 Excess Contributions... 89 Reporting the Penalty... 89 Waiver... 90 Terms of the Waiver... 90 Requesting a Waiver... 91 Review Questions... 92 Review Answers... 94 Chapter 6 Required Distributions During Your Lifetime... 96 Learning Objectives... 96 Introduction... 96 Required Beginning Date... 97 First Year... 98 Second Year and Beyond... 98 Computing the Required Amount... 99 Determining the Account Balance... 99 Determining the Applicable Distribution Period... 100 Computing the Required Distribution... 101 Special Aggregation Rule for IRAs and TDAs... 102 Reporting Distributions From IRAs... 102 Designating a Beneficiary... 102 Definition of Designated Beneficiary... 103 Multiple Beneficiaries... 104 Special Rules for Annuities... 105 Form of Payment... 105 Required Beginning Date... 105 Starting Early... 106 Young Beneficiaries... 106 Divorce or Separation... 107 Separate Account... 108 No Separate Account... 108 Income Taxes and Penalties... 109 Rollovers... 109 Review Questions... 111 Review Answers... 113 Chapter 7 Distributions to Your Beneficiary If You Die Before Age 70½... 115 Learning Objectives... 115 Introduction... 115 Determining the Designated Beneficiary... 115 Deadline for Determining Designated Beneficiary... 115 Changing Beneficiaries Before the Deadline... 116 Distribution Methods... 117 Life Expectancy Rule... 117 Five-Year Rule... 117 Rollover... 118 Effect of the Retirement Plan s Rules... 118 Spouse Beneficiary... 119 Life Expectancy Rule... 119 Rollover... 120 Convert to Roth IRA... 122 Death of Spouse Beneficiary... 122 Nonspouse Beneficiary... 123 Life Expectancy Rule... 123
Rollover... 125 Convert to a Roth IRA... 125 Death of Nonspouse Beneficiary... 125 No Designated Beneficiary... 126 Five-Year Rule... 126 No Life Expectancy Rule... 126 Multiple Beneficiaries, Separate Accounts... 126 Multiple Beneficiaries, One Account... 127 Life Expectancy Rule... 127 Five-Year Rule... 128 Splitting Accounts After Death... 128 When a Spouse Is One of the Beneficiaries... 130 Designated and Nondesignated Beneficiaries... 130 Trust Beneficiary... 131 Nonspouse Beneficiary of Trust... 131 Spouse Beneficiary of Trust... 132 Multiple Beneficiaries of Trust... 132 Trust Beneficiary and Spousal Rollovers... 133 Estate as Beneficiary... 133 Annuities... 134 Start Date... 134 Form of Payment... 134 Irrevocable Annuity... 134 Divorce or Separation... 134 Separate Account... 135 No Separate Account... 135 Reporting Distributions From IRAs... 135 Review Questions... 137 Review Answers... 138 Chapter 8 Distributions to Your Beneficiary If You Die After Age 70½... 140 Learning Objectives... 140 Introduction... 140 Administrative Details... 140 Name on the Account... 140 Timing of Distributions... 141 Designated Beneficiary... 141 Reporting Distributions... 142 Spouse Beneficiary... 142 Year of Death... 142 Second Year and Beyond... 142 Rollover... 143 Convert to a Roth IRA... 145 Death of Spouse Beneficiary... 145 Nonspouse Beneficiary... 146 Year of Death... 147 Second Year and Beyond... 147 Death of Nonspouse Beneficiary... 148 Rollover... 148 Convert to a Roth IRA... 148 No Designated Beneficiary... 148 Multiple Beneficiaries, Separate Accounts... 149 Multiple Beneficiaries, One Account... 149 Determining the Designated Beneficiary... 149 Computing the Required Distribution... 150
Splitting Accounts... 150 When a Spouse Is One of the Beneficiaries... 151 Trust Beneficiary... 152 Nonspouse Beneficiary of Trust... 152 Spouse Beneficiary of Trust... 152 Multiple Beneficiaries of Trust... 152 Trust Beneficiary and Spousal Rollovers... 153 Estate as Beneficiary... 153 Annuities... 154 Divorce or Separation... 154 Review Questions... 156 Review Answers... 157 Chapter 9 Roth IRAs... 159 Learning Objectives... 159 Introduction... 159 Taxation of Distributions... 160 Distribution of Nondeductible Contributions... 161 Distribution of Investment Returns... 161 Conversions and Rollovers... 163 Correcting Errors: Recharacterizing... 166 Early Distribution Tax... 168 Qualified Distributions... 168 Nonqualified Distributions... 168 Ordering of Distributions... 169 Required Distributions... 170 During Your Lifetime... 170 After Your Death, Before Your RBD... 171 After Your Death, After Your RBD... 171 Review Questions... 172 Review Answers... 173 Chapter 10 Roth 401(k) Plans... 174 Learning Objectives... 174 Introduction... 174 Taxation of Distributions... 174 Distribution of After-Tax Amounts... 175 Distribution of Pretax Earnings... 176 Conversions and Rollovers... 177 Early Distribution Tax... 178 Qualified Distributions... 178 Nonqualified Distributions... 178 Ordering of Distributions... 178 Required Distributions... 178 Required Distributions During Your Lifetime... 178 Required Distributions After Your Death... 179 Review Questions... 180 Review Answers... 181 Glossary... 183 Appendix A IRS Forms, Notices, and Schedules... 187 Appendix B Life Expectancy Tables... 193 Index... 215