Transcript Chartered Retirement Planning CounselorSM Professional

Chartered Retirement Planning CounselorSM
Professional Designation Program
Module 8
Retirement Plan
Distributions
©2013, College for Financial Planning, all rights reserved.
© 2012, College for Financial Planning, all rights reserved.
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-2
Questions to Get Us Warmed Up
8-3
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-4
Qualified Retirement Plan Distributions
General distribution types available at
retirement or separation from service
• lump-sum distribution
• rollover
• annuity
Pre-retirement access to qualified plan
funds
• in-service withdrawal
• hardship withdrawal (from 401(k) and 403(b) plans only)
• loan
Distribution requirements and
penalties
• premature distribution—10% penalty
• minimum distribution requirement—50% penalty
• requirements following death
8-5
One-Time Suspension on Required Minimum Distributions from Certain Plans for 2009 Only
• Effective for 2009 only, the Worker,
•
•
Retiree, and Employer Recovery Act
of 2008 imposed a moratorium
(suspension) on required minimum
distributions (RMDs) from individual
retirement plans (IRAs) and defined
contribution plans for 2009 only.
This relief applied to life-time plan
distributions to defined contribution
plan participants, IRA owners, and
after-death distributions to
beneficiaries.
It did not apply to pre-2009 and post2009 RMDs and defined benefit plans.
8-6
In-Service Withdrawals From Qualified Plans
Withdrawals Prior to Plan’s Normal Retirement Age
• permitted in profit sharing/stock bonus and thrift/
savings plans
• permitted in pension plans once employee attains age 62
• plan may impose restrictions but is not required to do so
Withdrawals After Plan’s Normal Retirement Age
• typically available in money purchase
and target benefit plans (defined
contribution pension plans)
• generally not available in defined
benefit plans due to complexity
of record keeping
8-7
In-Service Withdrawals From Qualified Plans
Amounts Available for Withdrawal
• per plan provisions
• usually vested portion of employer contributions
Tax Treatment of In-Service
Withdrawals
• 10% early withdrawal penalty
(if under age 59½)
• ordinary income tax treatment
8-8
In-Service Hardship Withdrawals from Profit Sharing or Stock Bonus 401(k) Plans
Amounts Available for In-Service 401(k)
Hardship Withdrawals
• limited to funds attributable to elective
deferrals—no earnings
Tax Treatment of Hardship
Withdrawals
• 10% early withdrawal penalty
(if under age 59½)
• ordinary income tax treatment
8-9
In-Service Hardship Withdrawals from Profit Sharing or Stock Bonus 401(k) Plans
Required Conditions for Hardship Withdrawal
Participant must establish that:
• other resources are not “reasonably available,” (i.e., have
exhausted other reasonably available resources) and
• there is an “immediate and heavy financial need”:
o medical expenses
o primary residence purchase
o college tuition
o housing costs to prevent
eviction or foreclosure
o funeral expenses for dependents
o principal residence repairs that
qualify for a casualty deduction
8-10
Qualified Plan Loans: General Rules
Loan from qualified plan
Terms, amount, availability of loan
Participant
8-11
Qualified Plan Loans: Terms
Must be:
•
•
•
•
•
available to all participants and beneficiaries on an equal basis
evidenced by a legally enforceable agreement
at a reasonable rate of interest
secured by a participant’s vested account balance (or other collateral)
made in accordance with plan provisions
Must not be:
• available in greater proportions to highly compensated employees than to
nonhighly compensated employees
•
a loan with a term exceeding five years (except for purchase of primary
residence)
•
•
Repayments must be made at least quarterly on a substantially
equal level amortization basis
8-12
Qualified Plan Loans: Amounts
Vested Account Balance Maximum Loan Amount
$10,000 or less
Entire vested account
balance*
$10,001 to $20,000
$10,000*
$20,001 to $100,000
50% of vested account
Over $100,000
$50,000
*Additional collateral would be required if the loan exceeds 50% of the vested account balance.
Most plans therefore limit loans to 50% of the vested amount
8-13
Qualified Plan Loans
To avoid characterization
as a prohibited transaction,
a loan from a qualified plan
must be:
• available to all participants and
beneficiaries
• not available to highly
compensated employees in greater
proportions than to nonhighly
compensated employees
• made in accordance with plan
provisions
• at a reasonable rate of interest
• adequately secured
• legally enforceable
8-14
Qualified Plan Loans
To avoid characterization as a taxable
distribution:
• loan term must not exceed five years
(except home loans)
• loan amount must not exceed
o the lesser of $50,000 or
o half of the present value
of the employee’s
nonforfeitable accrued
benefit or other applicable limit
• loan repayments must be
made quarterly on a level
amortization basis
8-15
Required Qualified Plan Survivor Annuities Provisions
Required for Pensions, optional for PSPs
• Annuity provides income for the life of a qualified plan
participant and for the life of his or her surviving spouse
o QJSA must provide survivor annuity for life of spouse,
with at least 50% of annuity payable during joint lives.
o QPSA must provide 50% survivor annuity for life of
spouse, payable at participant’s death before retirement.
• The right to a QJSA can be waived:
o in writing by the spouse, or
o if participant and spouse were married less than one
year, or
o if plan provides for full payment to surviving spouse at
participant’s death.
8-16
Required Qualified Plan Survivor Annuities
Qualified Plans Subject to Survivor Annuity
Requirements
• Defined benefit plans, target benefit plans, and money
purchase pension plans (qualified plans that are subject to
minimum funding standards) must comply with the QJSA,
QOSA, and QPSA requirements.
• Other defined contribution plans (profit sharing, stock bonus
plans) are exempt from the requirement if three conditions
are met:
1. vested accrued benefit is payable to spouse or alternate
beneficiary at death or participant,
2. participant does not elect annuity form of payment, and
3. plan is not a transferee of a plan that was subject to
survivor annuity requirements.
8-17
Qualified Plan Payout Options
•
•
The life annuity and joint and survivor annuity are just two of many
payout options generally available.
Another, the period certain annuity, provides regular monthly
payments over a specified period, even if the recipient (and
spouse) happens to die during the specified period. This ensures
payments to a named beneficiary.
Example
• Peter and his wife, Charlotte, have chosen a 20-year period-certain
annuity option for Peter’s retirement benefits.
• His plan administrator has told them that,
given Peter’s benefit level and the interest
assumption of the annuity, this option will
provide payments of $1,800 each month
for 20 years.
8-18
Qualified Optional Survivor Annuity (QOSA)
Married participants in a pension plan must be permitted
to elect payment in the form of a QOSA benefit.
• A QOSA is an annuity for the life of the participant with a survivor
• Annuity for the life of the spouse determined as follows:
• If the survivor annuity provided by the plan’s QJSA is less than
75% of the annuity payable during the joint lives of the participant
and spouse, then the survivor annuity provided by the QOSA must
be 75% of the annuity payable during the joint lives of the
participant and spouse.
• If the survivor annuity provided by the plan’s
QJSA is equal to or greater than 75% of the
annuity payable during the joint lives of the
participant and spouse, then the survivor
annuity provided by the QOSA must be
50% of the annuity payable during the
joint lives of the participant and spouse.
8-19
Lump-Sum Distributions
Required Conditions
• Represents full amount credited to participant accounts
• Distributed in one taxable year
• Payable due to participant’s death, attainment of age
59½, or separation from service (common law
employees only); or payable due to participant’s death,
attainment of age 59½, or disability (self-employed’s
option in place of separation from service)
• Made from a qualified pension,
profit sharing, or stock bonus
plan and all plans of the
same type
8-20
Tax Treatment of Stock Distributions Net
Unrealized Appreciation (NUA)
A distribution of shares of employer stock that qualify
for NUA treatment (in lieu of rollover treatment) are subject
to the following tax treatment:
• The recipient is immediately taxed on the cost, or basis,
of the securities received, and at ordinary income tax
rates.
• The NUA is not taxed until the recipient actually sells
the shares. When these shares are sold, the NUA
is taxed as long-term capital gain.
8-21
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-22
Rollover Distributions
These plans are eligible to
make and receive rollovers
from any of these
same plans
• Qualified plan to another QP, IRA, SEP, TSA, or
governmental 457 plan
To preserve 10-year
forward averaging
• Qualified plan to conduit IRA to qualified plan
Time period for
completion of rollover
• Rollover must be completed within 60 days
“Eligible rollover distributions” are distributions of all or any part of a qualified plan account, except:
•
Nontaxable portion of distribution
•
Part of a series of substantially equal periodic payments over 10 years or relevant life
expectancy
•
Required minimum distribution (age 70½)
•
Corrective distributions from a 401(k) plan
•
Loan treated as a distribution
•
Dividends on employer securities in an ESOP
•
Cost of life insurance coverage
•
Hardship distribution
8-23
Rollover Rules
403(a)
Plans
403(b)
Plans
SIMPLE IRA
Gov’t
457(b)
Plans
QRPs
401(a)
pretax &
after-tax
assets
pretax
assets
Traditional IRA
8-24
Tax Treatment of Rollover Distributions
• Rollovers enable funds to maintain tax-deferred growth.
• Funds rolled over become subject to tax treatment of
•
•
the rollover vehicle (e.g., qualified funds rolled into a
deductible IRA are subject to ordinary income tax, not
forward averaging).
A “conduit” IRA can preserve
eligibility for forward-averaging
tax treatment from another
qualified plan.
The 20% mandatory withholding
requirement applies to “eligible
rollover distributions” from qualified
plans and TSAs if distribution is not
a direct rollover.
8-25
Six Types of Rollovers (or Transfers)
1. Conduit IRA
2. Direct rollover (also known as a direct transfer
3.
4.
5.
6.
of eligible rollover distributions)
Trustee-to-trustee transfer
Indirect rollover
Spousal beneficiary
rollover
Nonspouse beneficiary
rollover
8-26
Conversions & Rollovers to a Roth IRA
A Roth IRA may accept rollover assets from other retirement
arrangements if the source of the rollover assets consists of a rollover
from:
• a qualified plan
• 403(b) arrangement
• Section 457 government plan
• traditional IRA
• Roth 401(k) account
• Roth 403(b) account
• another Roth IRA
Note: for this purpose, there is no ceiling on a retirement
arrangement owner’s (or that of the owner who files jointly)
adjusted gross income.
8-27
Lump-Sum Distribution
Four Conditions Required for Distribution to be Considered
a Lump Sum
•
Represents full amount credited to participant’s account (or benefit) from
all qualified plans of the same type
•
•
Distributed in one taxable year
•
Made from qualified pension, profit sharing, or stock bonus plan
Payable due to participant’s death, attainment of age 59½, or separation
from service (common law employees only); or payable due to
participant’s death, attainment of age 59½, or disability (self-employed’s
option in place of separation from service)
Four Options for Treatment of Lump-Sum Distribution
• Taxation: ordinary income rates
•
Taxation: forward-averaging method, if available; special treatment
available if age 50 before 1/1/86 (born before 1936)
•
•
Deferral: roll the distribution over, deferring tax liability until a future date
Net unrealized appreciation treatment for distributions of employer stock
8-28
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-29
Ten-Year, Forward-Averaging Tax Treatment
Eligibility
Participants
Distribution must be a “lump
sum.”
Must have been born before
January 1, 1936
Forward-averaging treatment
must be elected on all lumpsum distributions in tax year.
Use 10-year averaging on
ordinary income portion.
Individual must have been a
plan participant for at least five
tax years (this requirement is
waived if distribution is due at
death).
Treat pre-1974 portion of gain as
long-term capital gain, taxed at
20%.
Only one forward-averaging
election allowed in lifetime.
Advantages: Taxable amount is subject to possibly lower tax rate (tax
is calculated on 1/10 of taxable amount, using 1986 tax tables, then
multiplied by 10 to determine total tax).
8-30
Qualified Plan Annuity or Periodic Payment Distribution
Taxed under annuity rules (IRC §72) at ordinary rates—
exclusion ratio applied to each payment to determine
excludible amount:
Nontaxable portion Investment in the contract*

of payment
Expected return
Also, basis recovery tables of SBJPA 96 + TRA 97
• Available in accordance with plan provisions
• Lifetime survivor benefits must be provided by qualified plans
subject to minimum funding standards (e.g., defined benefit,
money purchase, target benefit).
*A participant’s “investment in the contract” (basis) includes after-tax
contributions, Table 2001 costs, and loans that were treated as taxable
distributions
.
8-31
Calculating Nontaxable Portion of Installment Distributions
Single Life
•
Use the method in the following example if payments are for one life such as a
single life annuity; payments are from a qualified employee plan, a qualified
employee annuity, or tax-sheltered annuity; and at the time payments began,
individual was either under age 75 or entitled to fewer than five years of guaranteed
payments. Divide cost basis by anticipated payments based on the schedule below.
Example
•
Ron is age 67, retiring this year, and is entitled
to receive his retirement benefits in the form
of a single life annuity payable monthly.
He has a cost basis in the annuity
of $28,000. The nontaxable
portion of the payments
received by Ron will be
$133 ($28,000/210).
Note: Once he has received 210
monthly payments, the rest are
fully taxable.
Age
Number of
Monthly
Payments
55 and under
360
56 to 60
310
61 to 65
260
66 to 70
210
71 and
over
160
8-32
Calculating Nontaxable Portion of Installment Distributions
Joint Lives
When there is more than one annuitant, such as a joint
and survivor annuity payable monthly over the lives of a
husband and wife:
Combined Age of
Annuitants
Number of
Monthly Payments
110 and under
410
111 to 120
360
121 to 130
310
131 to 140
260
141 and over
210
Total basis
Basis in each

annuity payment Number of payments
show n in table
8-33
Premature Distributions from Qualified Plans & Exceptions to the 10% Penalty
Definition
• Qualified retirement plan distributions received before age
59½ are premature distributions.
Penalty
• Subject to 10% early withdrawal penalty tax in addition to
income tax.
Penalty does not apply to a qualified plan distribution that is:
•
attributable to death or permanent disability
•
part of a series of substantially equal periodic payments over a qualified plan
participant’s life expectancy following separation from service
•
used for medical care up to amount deductible on participant’s inc. tax return
(amounts over 7.5% of AGI)
•
made to reduce excess plan contributions/deferrals – corrective distributions of
excess contributions from IRAs are permitted
The following exceptions are for qualified plans only – not IRAs:
•
made following separation from service after age 55
•
•
paid in accordance with a QDRO
a dividend paid by employer stock held by an ESO
8-34
Premature Distributions from IRAs & Exceptions to the 10% Penalty
Definition
• IRA distributions received before age 59½ are premature
distributions
Penalty
• Subject to 10% early withdrawal penalty tax in addition to
income tax
Penalty does not apply to an IRA distribution that is:
•
attributable to death or permanent disability
•
part of a series of substantially equal periodic payments over an IRA owner’s life
expectancy
•
used for medical care up to the amount deductible on the participant’s tax return
(amounts over 7.5% of AGI)
•
corrective distributions of excess contributions (corrective distributions of excess
plan contributions/deferrals applies to qualified plans)
Exceptions for IRAs only – not qualified plans
•
used for first-time homebuyer expenses ($10,000 lifetime cap)
•
used for qualified higher education expenses (tuition, fees, books, supplies required
for attendance)
•
used to pay health insurance premiums for qualifying unemployed individuals
8-35
Exceptions to the 10% Early Withdrawal Penalty: Summary
Type of Plan
Exception to Penalty
Qualified plans & IRAs
• Substantially equal payments from an IRA or
following separation from service
• Death or disability
• Medical expenses over 7.5% of AGI
• Corrective distributions of excess qualified plan
contributions and/or deferrals -- corrective
distributions of excess IRA contributions
Qualified plans only
• Separation from service after age 55
ESOP only
• Dividend paid by employer stock held by an
ESOP
Qualified plans only
• Qualified domestic relations order (QDRO)
IRAs only
• First-time home purchase
• Health insurance premiums while unemployed
• Higher education expenses
8-36
Series of Substantially Equal Periodic Payment (SOSEPP)
Exceptions to the
Premature Distribution
Penalty
These methods qualify:
• Required minimum
distribution method
• Fixed amortization method
• Fixed annuitization method
8-37
SOSEPP Exception
Required Min. Distribution Method
The annual payment for each year is determined by dividing the
account balance for that year by the number from the chosen
life expectancy table for that year. The account balance, the
number from the chosen life expectancy table (representing the
years of remaining life expectancy), and the resulting annual
payments are recalculated for each year.
Example
Mr. Smith is age 50 this year and single.
• His SOSEPP RMD for this year is $14,260.
• $500,000 IRA account balance divided
by 34.2, his life expectancy
(Single Life Table)
8-38
SOSEPP Exception
Fixed Amortization Method
The annual payment for each year is determined by amortizing in level
amounts the account balance over a specified number of years determined by
using an IRS approved life expectancy table and interest rate. The account
balance, life expectancy, interest rate, and resulting annual payment are
determined once for the first distribution year and the annual payment is the
same amount in each succeeding year.
Example
Mr. Smith, age 50, is single and has given the following
information for purposes of calculating his SOSEPP
payments under the fixed amortization method:
• His IRA account balance is $500,000.
• His life expectancy is 34.2 per the Single Life Table.
• 5.7% is a reasonable rate of interest per
IRS requirements.
PV = $500,000; N = 34.2; I = 5.7.
Solving for PMT = $33,537
8-39
SOSEPP Exception
Fixed Annuitization Method
Each year’s annual SOSEPP payment is determined by dividing the account balance by an
annuity factor that is the present value of an annuity of $1 per year beginning at the
taxpayer's age and continuing for the life of the taxpayer (or the joint lives of the
individual and beneficiary). The annuity factor is calculated by an actuary using an IRS
approved mortality table and interest rate. Under this method, the account balance, the
annuity factor, the chosen interest rate, and the resulting annual payment are determined
once for the first distribution year and the annual payment is the same amount in each
succeeding year.
Example
Mr. Smith, age 50, is a single individual. You have been given the
following information for purposes of calculating his SOSEPP
payments under the fixed annuitization method:
• his IRA account balance is $500,000, and
• the annuity factor for an individual age 50 is 15.1819
according to an actuary who using an IRS approved
mortality table and interest rate.
• Dividing his $500,000 account balance by 15.1819
results in a series of fixed annual payments of $32,934 each.
8-40
Qualified Plan & IRA 2008 and Post-2009 Distribution Requirements
Aggregation Rules
IRS rules allow a certain amount of aggregation for purposes of the RMD
rules. Each IRA’s RMD must be calculated separately. Total required
minimum distribution can be taken from any one or all of these IRAs.
Every other type of plan, however, must individually make an RMD.
Example
• Frank has three IRAs and participates in his
company’s profit sharing plan.
• After figuring the RMD for each of the IRAs,
he can take a distribution from one, two, or
all three—as long as it matches or exceeds
the RMD for his three IRAs.
• Frank must also take an RMD from his profit
sharing plan. He cannot aggregate this plan
with his IRAs when he makes the RMD
calculation.
8-41
Tax Treatment of Qualified Roth IRA Distributions
Distributions from a Roth IRA are either qualified
or nonqualified. A distribution is qualified if it meets
the five-year holding requirement (beginning with
the first year for which a Roth contribution is made)
and if it is made for any one of the following
reasons:
• after the owner’s attainment of age 59½,
• death of the owner,
• owner’s disability, or
• to an owner for a special purpose
(meaning a first-time home purchase
(maximum distribution of $10,000).
8-42
Tax Treatment of Nonqualified Roth IRA Distributions
The tax treatment of nonqualified distributions from a Roth
IRA is determined by the ordering rules, which treat all
amounts distributed as a distribution of after-tax
contributions first and then as a distribution of earnings.
• Therefore, no portion of a distribution is treated as
ordinary income (taxable income) until the
total of all prior distributions (after-tax
contributions) exceeds the total of all
prior contributions.
• Unless an exception applies, an earnings
distribution to an under age 59½ Roth
IRA owner is subject to the 10% early
withdrawal penalty.
8-43
Tax Treatment of Nonqualified Roth IRA Distributions
Example
• For the past 10 years, Jonathan Meiklehorn, age 32, contributed
$2,000 each year to a Roth IRA.
• During the current year, he withdrew his entire account balance of
$34,000 to buy a car.
• His account meets the five-year holding requirement, but he is not
age 59½, deceased, or disabled, nor is he using the money to buy
his first home.
Therefore, the distribution is not qualified:
• He has contributed $20,000, and this
amount comes out first and is not taxable.
• The remaining $14,000 of the distribution
is taxable and is subject to the 10% penalty.
• The portion of the distribution that is not
taxed is not subject to the penalty.
8-44
Tax Treatment of Roth IRA Distributions: Summary
Facts & circumstances:
distribution taken …
Classification
Tax treatment of
Tax treatment of
distribution of
distribution of
annual contributions earnings
after five years of Roth IRA
establishment by age 59 ½
individual, or for death,
disability, or special purpose
Qualified
Not subject to income
tax or penalty
Not subject to
income tax or 10%
penalty
after five years of Roth IRA
establishment by individual
under age 59½
Nonqualified
Not subject to income
tax or penalty
Subject to income
tax; also, subject to
10% penalty unless
exception applies
taken within five years of
Roth IRA establishment by
individual under age 59½
Nonqualified
Not subject to income
tax or penalty
Subject to income
tax; also, subject to
10% penalty unless
exception applies
8-45
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-46
Qualified Plan Distribution Requirements
Commencement of Distributions
• Qualified plan must provide for
retirement benefit distributions to
begin within 60 days after the plan
year-end in which the latest of the
following occurs:
o participant reaches age 65 (or
normal retirement age specified in
the plan, if earlier)
o participant has 10 years of plan
participation
o participant terminates service with
the employer
• Employee may elect other forms of
distribution
8-47
Qualified Defined Contribution Plan & IRA Distribution Requirements
Required Minimum Distributions (RMDs)
Qualified Plans:
• Required beginning date (RBD) for qualified plan distributions
must begin by April 1 of the calendar year following the later
of the calendar year in which:
o employee attains age 70½, or
o employee retires.
IRA Plans and greater than 5% business owner-participants:
• Required beginning date (RBD) for IRA distributions must
begin by April 1 of the calendar year following the year in
which:
o the individual attains age 70½
o whether working or not
8-48
IRA Distribution Requirements
Required Beginning Date
Distributions must be made over the
Uniform Table life expectancy of the
participant or the Joint and Last Survivor
Table life expectancies (see IRC Sec.
401(a)(9) regulations) of the participant
and the participant’s spouse if the spouse
is at least 10 years younger.
Penalty
Penalty for receiving less than the required
minimum distribution is 50% of the
difference between the amount that was
distributed and the amount that should
have been distributed.
8-49
Qualified DC Plan & IRA Distribution Requirements Following Participant’s Death
If RMDs
Have
Begun
Benefits remaining in the qualified
plan must be distributed over the
(RMD Single Life Table) life
expectancy of the beneficiary
beginning by December 31st of the
year following the year of the
participant’s death
Spouse beneficiary may roll over
qualified plan account to his/her
own IRA
If RMDs
Have
Not
Begun
Generally, entire benefit (account
balance) must be distributed by:
1) the end of the fifth year after
participant’s death if there is no
“designated beneficiary,” or
2) over the beneficiary’s life
expectancy (RMD Single Life
Table), beginning by December 31
of the year following the
participant’s death.
If spouse is the beneficiary:
1) may roll over account to an IRA,
or
2) can elect to begin distributions
by December 31 of the year in
which owner would have attained
age 70½
8-50
Qualified Domestic Relations Order (QDRO)
A QDRO is a court order issued in conjunction with a divorce
proceeding in which all or part of a participant’s qualified plan benefits
may be made payable to the participant’s spouse, former spouse, or
dependents as alimony, marital property rights, or child support.
(QDRO rules do not apply to IRAs.)
• Benefits paid under a QDRO to the plan participant's child or
dependent are treated as paid to the participant; hence, they are
taxable to the participant.
• Benefits paid to a spouse or former spouse may be rolled over into
a traditional individual retirement arrangement or another qualified
retirement plan.
• Benefits that are not rolled over must be included in the spouse's
or former spouse's income but are
not subject to the 10% early
distribution penalty.
8-51
Learning Objectives
8–1: Describe the distribution options available before and after
retirement.
8–2: Describe the pros and cons of rollover, and explain how
they can be accomplished.
8–3: Discuss the tax issues involved in retirement distributions—
forward averaging in particular.
8–4: Explain the IRS rules governing the timing and minimum
required size of retirement distributions.
8–5: Describe four steps that should be taken in making the best
distribution decision.
8–6: Discuss the issues relevant to survivors and beneficiaries of
retirement plan participants.
8–7: Describe alternative investments for lump-sum
distributions.
8-52
Investments for Lump-Sum Distributions Identifying Appropriate Financial Advisors
There are different “roofs” (financial advisors, trustees,
custodians, and financial institutions) under which
retirement plan lump-sum distributions can be placed
and effectively managed.
These roofs include:
• banks,
• brokerage firms,
• insurance companies,
• investment companies (mutual funds), and
• private money managers.
8-53
Investments for Lump-Sum Distributions Identifying Appropriate Financial Advisors
Many of the products and services appropriate for
retirees are available from all or several of these
vendors. As a result, differences between financial
service vendors are often blurred. However, the
decision about which roof (or roofs) should be
governed by the client’s investment strategy and,
in some cases, by distribution decisions already
made.
8-54
Investments for Lump-Sum Distributions Identifying Appropriate Financial Advisors
•
A shrewd and experienced stock
market investor who does most of
her own research and is good at
investing may be interested in a
self-directed IRA offered by a large
discount broker.
•
A very wealthy client may seek the
services of a someone who can
develop and manage an individually
crafted portfolio such as a private
money manager or possibly a bank
trust department or large brokerdealer.
•
An individual with little experience
or interest in investments who
needs a higher investment return to
maintain her standard of living
should consider hiring a
retirement counselor.
8-55
Investments for Lump-Sum Distributions Identifying Appropriate Financial Advisors
•
•
A retired executive of a major
corporation who has an
exceptionally large and
complicated estate may need
to get expert advice in three
areas: distribution options,
money management, and
estate planning.
An individual who is more
interested in safety rather than
higher returns and is
concerned about outliving his
retirement assets may be
interested in consulting with an
insurance company about an
annuity.
8-56
Question 1
Clark Benson, age 65, is a 3% owner and an employee of Oak Enterprises, Inc.
He has accumulated $250,000 in Oak Enterprises’ profit sharing 401(k) plan
during his 22 years of employment; to date, he has taken no distributions from
the plan. He plans to take distribution of the full account when he retires at
age 67.
Which of the following describe the tax consequences of Clark’s planned
distribution schedule?
I. not subject to the 10% early withdrawal penalty
II. subject to 15% mandatory withholding
III. subject to 50% minimum distribution penalty
IV. eligible for 10-year forward averaging
a.
b.
c.
d.
e.
I only
II and III only
III and IV only
I, II, and III only
I, III, and IV only
8-57
Question 2
At age 57, Anita Buford retired from PQR Corporation in January this year after
15 years of service. She received a check for the distribution of her account in
the PQR Money Purchase Plan. Her account balance was $60,000 on her final
day of employment.
Which of the following statements describe the income tax or penalty tax
consequences of this distribution?
I. subject to 10% penalty
II. subject to mandatory 20% withholding
III. eligible for 10-year forward averaging
IV. exempt from the 10% early withdrawal penalty
a.
b.
c.
d.
e.
I and II only
II and III only
II and IV only
I, II, and III only
I, II, and IV only
8-58
Question 3
In-service withdrawals prior to age 62 are not
permitted from which of the following?
a.
b.
c.
d.
profit sharing plans
cash balance plans
stock bonus plans
employee stock ownership plans (ESOPs)
8-59
Question 4
Taxes may be deferred on a qualified plan distribution if it
is rolled over to an IRA, TSA, SEP, governmental 457 plan,
or to another qualified plan. All are true regarding rollovers
except
a. they generally result in less money for retirement.
b. distributions must be transferred to a new account no later
c.
d.
than 60 days after receipt.
noncash property must be transferred to the new account.
funds rolled over may lose the potential to use forward
averaging.
8-60
Question 5
Which of the following is not a requirement for
ten-year forward averaging treatment?
a. the participant must have attained age 50 by
January 1, 1986
b. forward averaging must be elected for all lumpsum distributions received during the year
c. the employee must have been a participant in the
plan for at least eight years
d. the participant must be married
8-61
Chartered Retirement Planning CounselorSM
Professional Designation Program
Module 8
End of Slides
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© 2012, College for Financial Planning, all rights reserved.