5 Retirement Account Distributions Flashcards
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10% early withdrawal penalty exception for medical expenses?
For unreimbursed medical expenses above 7.5% of AGI.
Applies to all plans (Qualified Plans & IRAs).
10% early withdrawal penalty exception for education expenses?
For qualifying higher education expenses.
Applies only to IRAs (Trad, Roth, SEP, SIMPLE); doesn’t apply to Qualified Plans.
10% early withdrawal penalty exception for home-buying?
For qualified first-time homebuyers up to $10,000 lifetime limit.
Applies only to IRAs (Trad, Roth, SEP, SIMPLE); doesn’t apply to Qualified Plans.
10% early withdrawal penalty exception for health insurance?
For health insurance premiums paid while unemployed.
Applies only to IRAs (Trad, Roth, SEP, SIMPLE); doesn’t apply to Qualified Plans.
IRS Regulation 72(t)
10% early withdrawal penalty except for substantially equal periodic payments (SEPPs).
Applies to all plans (Qualified Plans & IRAs).
10% early withdrawal penalty exception for disability?
For total & permanent disability.
Applies to all plans (Qualified Plans & IRAs).
10% early withdrawal penalty exception after what age?
After age 59 1/2.
Applies to all plans (Qualified Plans & IRAs).
10% early withdrawal penalty exception after what retirement from company?
For when employee separates from service during or after the year they reach age 55.
Only applies to Qualified Plans; doesn’t apply to IRAs.
When are distributions from Roth IRAs tax-free and penalty-free?
Distributions are made per “ordering rules”:
1. Contributions (basis) are always tax- and penalty-free.
2. Converted amounts are always tax-free, but may get a 10% penalty if ≤ 5 yrs ago
3. Earnings are tax-free & penalty-free if they satisfy two requirements:
- 5-year rule (must be open > 5 yrs from Jan 1 of first contribution year)
- Must be either (a) 59 1/2 or older, (b) dead or disabled, or (b) using for a first-time home purchase ≤ $10K lifetime limit
10% rule is also waived if used for unemployed health insur., medical expenses > 7.5% of AGI, or higher ed expenses (but you still have to pay taxes on earnings if these are non-qualified distributions)
Inherited Roth IRA Distribution Requirements
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- Spouse: Can treat account as their own and forego RMDs for life
- Non-Spouse: 10-year rule applies (no RMDs but must be emptied by Dec 31st of the 10th year)
Acct must be open ≥ 5 years for withdrawals to be tax-free
Inherited (Non-Roth IRA) Retirement Acct Distribution Requirements
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If designated beneficiary is…
Eligible Designated Beneficiaries (EDBs): Distribs must be taken year after death (aka Stretch IRA / Lifetime RMDs) using new life expectancy.
Remember “SMOC”:
- Spouse - can roll IRA over into their own and/or defer RMDs until their age 73; don’t have to keep taking spouse’s RMDs
- Minor - < 21 years old, after which 10-yr rule applies (at age 21)
- Other benes “not more than 10 years younger” than decedent (e.g., sibling), can spread RMDs over life expectancy
- Chronically ill or disabled, can spread RMDs over life expectancy
Non-Eligible Designated Beneficiaries (NDEBs):
(essentially all other humans or qualifying trusts)
10-yr rule generally applies, i.e., entire acct must be emptied by Dec 31 of 10th year following orig owner’s death. No RMDs unless the decedent already started RMDs; then bene must continue them during years 1-9 and empty acct by year 10.
- Non-Spouse Bene. (adult child, grandchild, most others)
- “See-Through” Trust (fulfills reqs to qualify as a desig. bene)
- Successor Bene.
Non-Designated Beneficiaries:
(essentially all non-humans and non-qualifying trusts)
Five-year rule generally applies.
- Estate (if no bene. listed)
- Charities
- Trust (“Trust not Qualifying as a Desig. Bene”)
Failure to take required distributions may result in a 25% penalty (reduced to 10% if corrected quickly)
Consideration flow when considering distributions from an inherited retirement account
- Is it a Roth IRA?»_space; if non-spouse, 10-yr rule no matter what (also consider if it’s been open ≥ 5 yrs)
- Is the bene a spouse?»_space; Can treat as own
- Another eligible bene?»_space; Use their life expectancy
- Another indiv or qual. trust?»_space; 10-yr rule
- Not an indiv or qual. trust?»_space; 5-yr rule
- Did orig. owner die before Required Beginning Date? or on or after?
Basis of a (non-Roth) IRA?
The tax basis or “basis” of a tax-deferred account is the after-tax contributions (not the total contributions)
Penalty for early withdrawals from retirement accounts? (and annuities)
- 10% early withdrawal penalty before age 59½
- applies only to the taxable portion of the withdrawal—not the entire amount
- only for withdrawals. annuitization is ok!
Exceptions apply.
RMDs
- Start by April 1 following year you turn 73 (even if you’re still working). BUT 401ks for your current employer can wait until you actually retire (unless you own > 5% of the sponsor company).
- next RMD by 12/31 of current year
- FMV of accts as of 12/31 ÷ age factor
Not required during life of Roth owners
So if turn 70 1/2 in 2024, first RMD is taken by 4/1/25 using 12/31/24 balance, then second RMD is taken by 12/31/25
Reqs for QCDs
- age?
- max?
Qualified Charitable Distribution
- ≥ 70 1/2 on day of distrib
- ≤ $105K annual exclusion per person
- Direct transfer (this avoids it increasing your AGI before the itemized charitable deduction)
Qualified Plan Net Unrealized Appreciation (NUA) Rules
100% lump sum distribution of employer stock in a qualified plan gets favorable NUA rules: basis taxed @ ordinary income, gain deferred until sale, then taxed as LTCG (regardless of holding period) (NO STEPUP AT DEATH); any add’l gain/loss between distrib & sale taxed normally at STCG or LTCG
If younger than 59 1/2, the cost basis of the stock would be subject to a 10% early withdrawal penalty.
Qualified Domestic Relations Order (QDRO)
- For?
- Who pays tax? penalty?
- For a qual. plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent. Specifies particip, alternate payees, last known mailing address, & percentage.
- Recipient can either pay tax on income or roll it over into an IRA or other plan. No penalty before age 59 1/2. PAYOR is not subject to income tax (unlike current alimony/child support system).
QDRO is for qual. plans, but same process applies to IRAs
Penalty for missing RMDs
25% penalty tax on undistributed amount
Are IRAs and 401(k)s aggregated for RMDs?
(401ks must be calc’d & distrib’s separately; IRAs can be aggregated
Investments in which government/charity retirement plan are limited to what?
- which: 403(b)
- limited to: mutual funds and annuities
How much do you have to withhold if you do a traditional rollover?
- 20%
If an IRA or 401(k) has after-tax and pre-tax contributions, do withdrawals pull out pre-tax first, after-tax first, earnings first, or proportionally?
Proportionally per the Pro Rata Rule
