Retirement Accounts Flashcards
(42 cards)
What is the five-year non-exclusion period for a Roth IRA?
In order to qualify for NO taxable income upon withdraw of Roth IRA, you must be 59 1/2 (for no penalty) AND it must be five years since the INITIAL contribution. If less than 5 years, will be subject to income tax.
How does the five-year non-exclusion period apply to a beneficiary of a Roth IRA?
A surviving spouse ONLY can elect to treat the Roth IRA as her own and use the earlier of the decedent’s five-year non-exclusion period OR the surviving spouse’s five-year non-exclusion period. NO other beneficiary can do this – all other beneficiaries must use the decedent’s non-exclusion period.
What are surviving spouse’s income deferral options for a deceased spouse’s IRA?
1) Indirect rollover (20% income tax w/holding); 2) Direct rollover, trustee to trustee (no w/holding tax); 3) Remain a beneficiary of spouse’s IRA (inherited or beneficial IRA acct)
For options 1 and 2, the spouse is treated as the owner of the IRA & cannot take distributions until 59 1/2.
For option 3, the surviving spouse can take distributions before 59 1/2 without penalty OR can delay taking distributions until the decedent would have been 72.
What is the Required Beginning Date (RBD) for RMDs?
For anyone who was NOT 70½ as of December 31,
2019, the Required Beginning Date under IRC Section 401(a)(9)(c) is generally April 1 of the calendar year following the calendar year when the individual reaches age 72.
For anyone who was 70½ as of December 31, 2019, the Required Beginning Date generally remains April 1 of the calendar year following the calendar year when the individual reached age 70½
Are there RMDs for Roth IRAs?
No (exempt from RMDs)
What if the decedent had not reached age 72 at death and spouse inherits?
If the sole designated beneficiary is the spouse, distributions must begin by the later of the end of the calendar year following the year in which the participant died or the end of the calendar year in which the employee would have attained age 72. So, can delay distributions if decedent was NOT yet 72 at death.
What if the decedent does not have a designated beneficiary?
If there is no designated beneficiary, the entire interest must be distributed within five years after the participant’s death. This means the remaining balance must be distributed by the end of the calendar year that contains the 5th anniversary of the employee’s death. SECURE Act removed the distribution requirement for duration of participant’s life expectancy.
What is the 10-year rule for designated beneficiaries under the SECURE act?
A designated beneficiary is an individual designated as a beneficiary by the employee. Individuals who are designated beneficiaries have 10 years to withdraw the decedent’s account balance whether or not the decedent had started distributions before death after reaching RBD
This means that the entire account balance must be distributed by the end of the calendar year in which the 10th anniversary of the decedent’s date of death occurs.
Doesn’t matter if the plan participant was or was not over age 72.
What is a designated beneficiary?
A designated beneficiary must be an individual selected by the participant.
The designated beneficiary’s identity is determined as of September 30 following the year of the participant’s death.
Who is an “eligible designated beneficiary” under the SECURE act?
An “eligible designated beneficiary” is a designated beneficiary who fits within one of the following categories:
(1) The surviving spouse of the employee
(2) A child of the employee who has not reached the age of majority
(3) A disabled individual within the meaning of IRC Section 72(m)(7)
(4) A chronically ill individual meeting certain requirements
(5) An individual not more than 10 years younger than the employee.
How did CARES act impact RMDs?
No RMDs for one year only - 2020.
Does the SECURE Act apply to Roth IRAs?
Yes. Same IRA rules for 10 year pay out to designated beneficiaries.
How do “eligible designated beneficiaries” take IRA distributions under SECURE Act?
In general, the life expectancy of an eligible designated beneficiary may be used for the distribution of the decedent’s remaining account balance IF distribution begins within 1 year after the employee’s death. So, RMDs based on beneficiary life expectancy. However, different rules for spouse and minor child.
How are rules different for surviving spouse under SECURE Act?
If the surviving spouse is the sole beneficiary, the surviving spouse can wait to be begin distributions until the deceased spouse would have been age 72.
How are rules different for minor child under SECURE Act?
If the beneficiary is a child of the decedent who has not
reached the age of majority, the entire remaining account balance must be distributed within the 10-year period after such date.
If the child dies after reaching majority but before the entire account balance has been distributed, the child’s beneficiary must receive distribution by the end of the child’s 10-year distribution period. NO tacking on by the subsequent beneficiary.
If using trusts to hold IRA interest, is okay to point to one trust which then sub-divides the asset?
No. The separation must occur with the beneficiary designation.
The ability to use the separate accounts rule to calculate the minimum required distributions to multiple trust beneficiaries requires that the separate accounts be established by the terms of the beneficiary designation rather than the terms of the trust instrument.
If only the trust is named as the beneficiary, the separate accounts rule does not apply even though the amounts payable to the trust will be allocated to separate beneficial shares once in the hands of the trustee.
Can a charity be a designated beneficiary?
No. Only individuals can be designated beneficiaries whose permitted distribution periods may be used
to compute required minimum distributions.
Can name a charity as a contingent beneficiary of a conduit trust but not of an accumulation trust.
What is a multi-beneficiary trust under SECURE act?
The SECURE Act creates a new category of trusts
called “applicable multi-beneficiary trusts” that permit the use of an eligible designated beneficiary’s life expectancy to calculate minimum required
distributions. To be an applicable multi-beneficiary trust, the trust must have more than one beneficiary, all the beneficiaries must be treated as designated beneficiaries, and at least one beneficiary of the trust must be an eligible designated beneficiary who is disabled or chronically ill.
What planning options are there for a multi-beneficiary trust that includes a disabled or chronically ill eligible designated beneficiary?
IRC Section 401(a)(9)(H)(iv) permits only two types of
applicable multi-beneficiary trusts:
a. The first type of trust divides into separate shares immediately upon the death of the employee or the IRA owner which results in only the share of the eligible designated beneficiary qualifying for the use of such individual’s life expectancy for calculating the RMD.
b. The second type of trust provides that no individuals other than disabled or chronically ill eligible designated beneficiaries have an interest in the plan of the employee or the IRA until all eligible designated beneficiaries have died which results in each remainder beneficiary of the trust being subject to the 10-year rule in calculating each remainder beneficiary’s RMD.
What type of plans does ERISA apply to?
Applies to any employee benefit plan unless a specific exception applies. ERISA Section 514(a) preempts any State laws that “relate to: employee benefit plans covered by ERISA.
No exemption from ERISA preemption exists for the typical private employer “qualified” retirement plan such as a 401(k) plan.
Can an attorney face malpractice for failing to include beneficiary designations in estate planning?
Yes, see Vermont case.
What are three common types of retirement plans that are exempt from ERISA?
- Plans sponsored by federal, state, and local governments. See ERISA Section 4(b)(1).
- IRAs established by individuals rather than as part of an employer plan. (IRAs!!)
- Retirement plans WITHOUT at least one participant who is a NON-owner common law employee. 29 C.F.R. ‘ 2510.3-3(c). An example would be a self-employed individual’s HR-10 plan in which only the self-employed individual participates.
Under IN law, can IRAs be liable for estate allowances or claims?
No. See 2011 amendment to TOD statute. IRAs are excluded from liability for allowed claims and statutory survivor allowances when the probate estate is insufficient to pay such claims and allowances. Ind. Code 32-17-13-1(b)(4); 32-17-13-2.
What is the outcome of plans that are exempt from ERISA?
IRAs and state government plans are governed by state law and NOT ERISA law. There are two different sets of applicable law. Non-ERISA plans are governed by state-specific law, and vary state-to-state.
