Module 6: Plan Distributions Flashcards
(34 cards)
Types of Basic Qualified Plan Distributions
- lump sum distribution
- an annuity or other form of periodic payment
- a rollover or direct transfer
Three conditions for lump-sum distributions to qualify for favorable tax treatment
- the distribution must represent the entire amount of the employee’s benefit in the plan
- an election must be made by the participant (or their estate) within one year of the receipt of the distribution
- The distributions must be due to one of the following:
1. Death
2. 59.5
3. Separation of service
4. Disability
In-Service withdrawal Features
- usually not allowed by a pension plan before 62.
- Profit Sharing may offer earlier, like 59.5.
How much of an annuity distribution received from a qualified plan is taxable
it’s taxable as ordinary income to the extent that it exceeds the allocated portion of the employees basis, if any.
Survivorship Rules for Pension Plans
- all defined benefit plans must provide two forms of survivorship annuities for spouses: qualified pre-retirement survivor annuity and qualified joint and survivor annuity
What is a “direct Transfer”
occurs when the trustee or other custodian who holds the assets making up the participant’s accrued benefits transfers some or all of those assets directly to the trustee or custodian of another retirement plan or IRA
Who is the 20% mandatory withholding for?
Qualified plans, including the SIMPLE 401k. It is not for IRA, SEP IRA, or SIMPLE IRA distributions.
What cannot be rolled over?
- RMD’s, withdrawals from electing out of automatic contribution arrangements, the return of an excess contributions, and hardship withdrawals
What is the Required Beginning Date for an RMD?
April 1 of the year following the year in which the retired plan participant becomes age 72. This is called the “trigger” year
Alternative ‘trigger year’ for those who are still working at 72
This is April 1 after the year in which they actually retire. This is for qualified plans only though, no IRA’s.
**however this is not allowed if the participant is a greater than 5% owner, either directly or through family attribution, of the business sponsoring the retirement plan.
Rules for Qualified Plan and Sect. 403b Plan Loans
The loans must be repaid within 5 years with interest. The only exception to this rule is when a plan loan is made to allow the participant to acquire a dwelling to be used as principal residence. Repayments must be made in level installments at least quarterly.
How much can a plan offer for a loan?
limited to half the vested account balance of the plan participant, not to exceed a dollar cap of $50,000. With loans less than $10,000 the total vested balance is allowed
Loan Reduction Rules
The maximum loan balance must also be reduced further by the highest outstanding loan balance the participant had in the one-year period preceding the loan
How are loan payments taxed?
Technically they’re taxed twice, the money is taxed when it goes in and then taxed when it comes out. Because the loan interest is considered consumer interest by the IRS, it is nondeductible.
Deemed Distributions
Remaining loan balances that aren’t paid after a certain period that cannot be rolled into another retirement plan, governmental 457 plan or an IRA. That means the unpaid loan balance after the allowed period is subject to both income tax and the 10% early distribution penalty rules.
the manner in which qualified plan or IRA benefits are distributed depends on:
- is there a designated beneficiary or EDB of the plan or account?
- Have RMDs already begun at the time of the participant-owner’s death?
Difference between a beneficiary, designated beneficiary, and EDB
Beneficiary can become the new owner of retirement assets, designated beneficiary is the person whose age and status are used to calculate the RMD and EDBs are people who are eligible to be designated beneficiaries.
Who can qualify as an EDB?
surviving spouse
- people not more than 10 years older than the deceased
- a disabled person
- a chronically ill person
- a minor child of the decedent
Why does it matter if someone is an EDB?
They can use the persons life expectancy as the factor for RMD’s, rather than the 10 year rule.
Date for determining a designated beneficiary:
September 30 of the year following the year of the participant-owner’s death.
Who is a nonspouse EDB
someone not more than 10 years younger than the decedent, someone who was chronically ill or disabled on the DOD, or a minor child of the decedent.
Death Occuring Before the RBD date for an EDB
The distributions period is the remaining life expectancy of the nonspouse EDB. The age is calculated by using the age of the nonspouse EDB in the year following the year of the decedent’s death, reduced by one for each subsequent year.
- also the 5 year rule or lump sum payment if they want
Death Occurring on or After the RBD for an EDB
The distribution must be distributed at least as rapidly as the longer of the remaining life expectancy of the designated beneficiary or the deceased owner’s life expectancy that would have been applicable for RMD purposes.
The Situation for a Designated Beneficiary
If the people do not qualify as a EDB, then they are a designated beneficiary, and they must follow the 10 year rule, where the inherited retirement account must be totally gone by Dec 31 in the year containing the 10th anniversary of the decedent’s death
