Qualified Plan Distributions

Question 1

What is a lump sum distribution in a qualified plan?

Answer 1

Distribution of the entire account balance or accrued benefit within one taxable year

Question 2

What events allow a lump sum distribution?

Answer 2

Death, age 59½, separation from service, or disability

Question 3

How long must an employee participate in the plan to qualify for a lump sum distribution?

Answer 3

At least five years prior to the distribution.

Question 4

How many lump sum distributions are allowed per plan?

Answer 4

Only one per plan.

Question 5

Do all distributions qualify as lump sum distributions?

Answer 5

No; see IRS Form 4972 for exclusions (e.g., IRAs, certain rollovers)

Question 6

Who is eligible for special tax treatment on lump sum distributions?

Answer 6

Participants born before January 2, 1936.

Question 7

What is pre-1974 capital gain treatment for lump sum distributions?

Answer 7

Portion attributable to pre-1974 participation is taxed at 20% long-term capital gains rate

Question 8

What is 10-year forward averaging for lump sum distributions?

Answer 8

Tax calculated using 1986 ordinary income rates; 1/10 of the lump sum, then multiplied by 10.

Question 9

What happens if no special tax election is made for a lump sum distribution?

Answer 9

The entire distribution is taxed as ordinary income

Question 10

Can lump sum distributions be rolled over?

Answer 10

Yes, all or part can be rolled over to defer taxes

Question 11

What is Net Unrealized Appreciation (NUA)?

Answer 11

NUA = Fair Market Value at distribution minus value at employer contribution for employer securities

Question 12

How is the cost basis of employer stock taxed at distribution?

Answer 12

As ordinary income.

Question 13

How is NUA taxed when the stock is sold?

Answer 13

As long-term capital gain, regardless of holding period.

Question 14

How is appreciation after distribution taxed?

Answer 14

As short- or long-term capital gain, depending on holding period after distribution.

Question 15

Does NUA receive a step-up in basis at death?

Answer 15

No; original NUA remains taxable as LTCG to heirs

Question 16

Are loans allowed in most qualified plans?

Answer 16

Yes, commonly in CODA-type plans.

Question 17

What is the maximum plan loan amount?

Answer 17

Lesser of $50,000 or 50% of vested account balance.

Question 18

What if the vested balance is less than $20,000?

Answer 18

Maximum is greater of $10,000 or 50% of balance

Question 19

How is the maximum loan reduced?

Answer 19

By the highest outstanding loan balance in the previous 12 months

Question 20

What are the SECURE 2.0 disaster relief loan limits?

Answer 20

Up to $100,000 or 50% of vested balance for qualified disasters.

Question 21

What is the standard repayment term for plan loans?

Answer 21

5 years

Question 22

What is the repayment term if used for a principal residence?

Answer 22

Up to 30 years.

Question 23

What happens if a plan loan is not repaid?

Answer 23

Treated as a taxable distribution, possibly subject to a 10% early withdrawal penalty

Question 24

What is the penalty for early distribution from a qualified plan?

Answer 24

10% penalty on distributions before age 59½.

Question 25

Name a general exception to the 10% early withdrawal penalty.

Answer 25

Death, disability, substantially equal periodic payments, medical expenses >7.5% AGI, federal tax levy, birth/adoption, federally declared disaster

Question 26

Name a qualified plan-only exception to the 10% penalty.

Answer 26

Separation after age 55, separation after age 50 (public safety), QDRO

Question 27

Name an IRA-only exception to the 10% penalty.

Answer 27

Health insurance for unemployed, higher education costs, first-time home purchase (up to $10k), terminal illness

Question 28

What are Section 72(t) distributions?

Answer 28

Substantially equal periodic payments, at least annually, for the longer of 5 years or until age 59½

Question 29

What methods can be used for Section 72(t) distributions?

Answer 29

Required Minimum Distribution (RMD), Fixed Amortization, or Fixed Annuitization

Question 30

When must the first RMD be taken?

Answer 30

By April 1 of the year after turning 73

Question 31

When are subsequent RMDs due?

Answer 31

By December 31 each year

Question 32

When can RMDs be delayed past age 73?

Answer 32

If still employed and not a >5% owner, delay until April 1 after retirement.

Question 33

What is the penalty for missing an RMD?

Answer 33

25% of the shortfall (or 10% if corrected promptly)

Question 34

How is the RMD calculated?

Answer 34

Account balance as of December 31 of prior year divided by applicable life expectancy factor

Question 35

What are the options for a spouse beneficiary?

Answer 35

May treat as own, roll over, or stretch over own life expectancy.

Question 36

What are the options for an eligible designated beneficiary?

Answer 36

Life or life expectancy, beginning year after death

Question 37

What is the rule for a designated beneficiary?

Answer 37

Entire balance must be distributed by the end of the 10th year after death.

Question 38

What is the rule for a non-designated beneficiary?

Answer 38

Entire balance must be distributed by the end of the 5th year after death.

Question 39

What tax implications should you focus on for the CFP exam?

Answer 39

Capital gain, 10-year averaging, and NUA