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Retirement > Chapter 7 - Distributions from Qualified Plans > Flashcards

Chapter 7 - Distributions from Qualified Plans Flashcards

1
Q

Define Adjusted Basis

A

The portion of a distribution that is not subject to income tax. Usually, the return of after-tax contributions or nondeductible contributions.

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2
Q

Define CODA (Cash or Deferred Arrangement)

A

Permits an employee to defer a portion of their salary on a pretax basis to a qualified plan or receive the salary on a pretax basis to a qualified plan or receive the salary as current taxable income.

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3
Q

Define Direct Rollover

A

Occurs when the plan trustee distributes the account balance directly to the trustee of the recipient account.

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4
Q

Define Early Withdrawal Penalty

A

A 10% penalty on distributions made before the participant attains the a age of 59 1/2 (Exceptions apply)

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5
Q

Define Fixed Amortization Method

A

The payment is calculated over the participant’s life expectancy if single, or the joint life expectancy if married, and the interest rate is reasonable.

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6
Q

Define Fixed Annuitization Method

A

The participant takes distributions of the account over a number of years determined by dividing the account balance by an annuity factor using a reasonable interest rate and mortality table.

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7
Q

Define Indirect Rollover

A

A distribution to the participant with a subsequent transfer to another qualified account (or IRA).

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8
Q

Define Joint Life Expectancy Table

A

The life expectancy table used to determine a participant’s RMD when the participant’s sole designated beneficiary is the participant’s spouse and that spouse is more than 10 years younger than the participant.

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9
Q

Define Net Unrealized Appreciation (NUA)

A

A special taxation treatment for a lump-sum distribution from a qualified plan that treats part of the distribution as capital gain.

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10
Q

Define Plan Loans

A

Loans from a qualified plan made available to all participants on an effectively equal basis that are limited in amount (no greater than $50,000 or half of the vested account balance), are repaid within a certain time period (usually five years), bear a reasonable rate of interest, are adequately secured, and require the administrator to maintain a proper accounting.

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11
Q

Define Pre-1974 Capital Gains Treatment

A

A special taxation treatment for lump-sum distributions from qualified plans that treats the distribution attributable to pre-1974 participation in the plan as long-term capital gain.

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12
Q

Define Qualified Domestic Relations Order (QRDO)

A

A court order related to divorce, property settlement, or child support that can divide the participant’s interest in a qualified plan.

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13
Q

Define Qualified Joint and Survivor Annuity (QJSA)

A

The AJSA pays a benefit to the participant and spouse as long as either lives; although, at the death of the first spouse, the annuity may be reduced.

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14
Q

Define Qualified Optional Survivor Annuity (QOSA)

A

An annuity for the life of the participant with a survivor annuity for the life of the participant’s spouse that is equal to a specified applicable percentage of the amount of the annuity that is payable during the joint lives of the participant and the spouse (and that is actuarially equivalent to a single life annuity for the life of the participant).

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15
Q

Define Qualified Pre-Retirement Survivor Annuity (QPSA)

A

Provides benefit to the surviving spouse if the participant dies before attaining the normal retirement age.

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16
Q

Define Required Minimum Distribution (RMD)

A

A minimum amount that must be withdrawn from a qualified plan (or IRA) each year after the participant attains the age 70 1/2. The amount is calculated using either the uniform distribution table, the single life expectancy table, or the joint life expectancy tables.

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17
Q

Define Required Minimum Distribution Method

A

The payment is calculated in the same manner as required under the RMD rules. Note that payments are recalculated annually.

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18
Q

Define Rollover

A

To elect to transfer funds from one tax-advantaged account to another tax-advantaged account to continue to defer the recognition of income taxes until the ultimate distribution of assets.

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19
Q

Define Separate Interest Approach

A

Divides the participant’s retirement benefit into two separate portions: one for the alternate payee and one for the participant.

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20
Q

Define Single Life Expectancy Table

A

Tables used to calculate the RMD for beneficiaries.

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21
Q

Define Shared Payment Approach

A

Splits the actual benefit payments made between the participant and the alternate payee.

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22
Q

Define 10-Year Forward Averaging

A

A method of income tax calculation for certain lump-sum distributions from qualified plans that divides the taxable portion of the lump-sum distribution by 10 and applies the result to the 1986 individual income tax rates. The resulting calculation is then multiplied by 10 to determine the total income tax due on the distribution.

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23
Q

Define Uniform Lifetime Table

A

A table used to calculate the RMD for the plan participant unless the participant’s sole beneficiary is the participant’s spouse and that spouse is more than 10 years younger than the participant.

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24
Q

Define Lump-Sum Distributions

A

A complete distribution of a participant’s account balance within one taxable year on account of death, disability, attainment of age 59 1/2, or separation from service. Some lump-sum distributions from qualified plans are eligible for special taxation options.

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25
Q

What are the basic distribution options a qualified plan provides? 5

A
  • Lump-sum distribution
  • Rollover distribution
  • Annuities (single life and joint life)
  • In-service withdrawal
  • Non-repaid loans
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26
Q

Why are distributions from a pension plan usually made? 5

A
  • Participant’s termination of employment
  • Early retirement
  • Normal Retirement
  • Disability
  • Death
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27
Q

What three distribution options may be available to a participant who terminates employment before normal retirement age?

A
  1. Receive a lump-sum distribution on the qualified plan assets,
  2. Roll the assets over to an IRA or other qualified plan, or
  3. leave the funds in the pension plan
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28
Q

What is a forced payout?

A

When a participant’s vested account balance is less than $5,000, the law permits, but does not require ,that the plan distribute the balance to the participant if they did not make a timely election.

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29
Q

When must a Qualified Joint and Survivor Annuity provided?

A

This option, which can be waived by the participant, must be provided to married participants on a pension plan and must also be provided to married participants of profit sharing plans.

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30
Q

When does a QJSA option need to be provided?

A

When the plan meets the following criteria:

  1. The plan provides that the participant’s nonforfeitable accrued benefit is payable in full, upon participant’s death, to the participant’s surviving spouse (unless the participant elects, with spousal consent, that such benefit be provided instead to a designated beneficiary).
  2. The plan does not elect the payment of benefits in the form of a life annuity.
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31
Q

What tax is a full distribution under a QPSA subject to?

A

Ordinary income tax and estate tax.

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32
Q

What are the distribution options available for pension plans for participant’s that reach normal retirement age? 3

A
  • Qualified Joint and Survivor Annuity
  • Single Life Annuity if QJSA is waved or no spouse
  • Lump-sum
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33
Q

What might be the costs of rollover a qualified plan into an IRA? 4

A
  • Lose potential NUA
  • Lose potential 10-year forward averaging
  • Lose potential pre-74 capital gains treatment
  • Lose ERISA anti-alienation protection (but not protection under federal bankruptcy laws_
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34
Q

What options can a PSP provide for distributions? 3

A
  • Take a lump sum
  • Annuitize the value of the account
  • roll the assets over into a rollover qualified plan or IRA
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35
Q

When taking a distribution from a qualified plan, generally what is required to be withheld for income tax purposes?

A

20%`

36
Q

What are the two ways rollovers can be taken?

A
  • Direct rollover

- Indirect rollover

37
Q

What are two primary reasons that funds rolled over to an IRA from a qualified plan should be segregated from other IRA assets?

A
  1. The funds rolled over from a plan can later be rolled over into another qualified plan, assuming the receiving plan permits such contributions.
  2. Rollovers, unlike traditional IRAs, are fully protected under bankruptcy law and therefore rollover funds should be segregated to maintain this protection.
38
Q

What reasons might a person have for wanting to rollover assets from a qualified plan to an IRA? 3

A
  • To continue to defer the recognition of income taxes until the ultimate distribution of the assets from the new plan.
  • To increase their investment choices
  • To have more control over the plan assets.
39
Q

What are accounts that hold rollover funds often referred to as?

A
  • IRA rollover accounts

- Conduit IRAs

40
Q

What is not required when doing a direct rollover?

A

Withholding 20% of the distribution for federal income tax.

41
Q

What are the two steps of an indirect rollover?

A
  1. A check is paid directly to the participant less a 20% withholding.
  2. Within 60 days, the participant must transfer an amount equal to 100% (including the withholding) to avoid a taxable distribution.
42
Q

What facts and circumstances might be taken into consideration if a person is to have the 60-day rollover requirement waived? 4

A
  • Errors by a financial institution
  • Inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error.
  • The use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and
  • The time elapsed since the distribution occurred.
43
Q

When is a plan able to take a rollover of after-tax contributions?

A

If the plan provides separate accounting for such contributions and the applicable earnings on those contributions.

44
Q

What plans are eligible to have Roth accounts? 3

A

401k
403b
457

45
Q

Name and describe the two basic types of conversion that permit a taxpayer to change pre-tax retirement funds into Roth funds.

A
  1. A qualified rollover contribution - Transferring assets from a traditional IRA or qualified plan to a Roth IRA.
  2. An in plan Roth rollover - Where pretax funds in a qualified plan are converted or rolled over into a Roth account in a 401k, 403b, or 457 plan.
46
Q

What are four possible benefits of a Roth conversion?

A
  • Tax reduction / tax diversification
  • Tax-deferred funds transfer
  • MRD avoidance, and
  • Possible estate tax reduction.
47
Q

How can having money in a Roth account help when you have money in tax-deferred accounts during retirement?

A

Being as Roth distributions are not subject to income tax they won’t be included in income to raise your tax bracket, which may make it cheaper to take distributions from other tax-deferred retirement accounts.

48
Q

Even if the taxpayer’s tax bracket never changes, why could it be unwise to do a Roth conversion?

A

If paying the extra taxes that year cause a lose of deductions, exemptions are phased out, or credits are lost.

49
Q

Being as there is clearly a monetary advantage of converting assets to a Roth if it can be accomplished at a current lower tax rate that is lower than future tax rates, when is the best time to do a Roth conversion?

A

When the value of pre-tax assets is low, such as on market drops or corrections, and in years that taxable income is low.

50
Q

What is the due date for Roth recharacterizations?

A

The due date of the income tax return, including extensions.

51
Q

An individual may not reconvert the amount from a traditional IRA to a Roth IRA before what?

A
  1. The beginning of the taxable year following the taxable year in which the amount was converted to a Roth IRA or, if later,
  2. The end of the 30-day period beginning on the day on which the IRA owner transfers the amount from the Roth IRA back to a traditional IRA by means of a recharacterization (regardless of whether the recharacterization occurs during the taxable year in which the amount was converted to a Roth IRA of the following taxable year.)
52
Q

When would you consider recharacterizing a Roth IRA conversion?

A

If you converted it and the account value subsequently declined in value.

53
Q

What can now be eligible for an in plan conversion without regard to whether they satisfy the conditions for distribution? 3

A
  • Elected deferrals in 401(k) plans and 403(b) plans
  • Matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions described in §1.401(k)-6, and
  • Annual deferrals made to governmental 457(b) plans
  • Note: The federal government’s Thrift Savings Plan is treated as a 401(k) plan for this purpose.
54
Q

What is not allowed if you are rolling over funds from a Roth account to another Roth account?

A

An indirect rollover.

55
Q

Either of which two things must have occurred for a participant to have an adjusted basis?

A
  • The participant made after-tax contributions to a contributory qualified plan, or
  • The participant was taxed on the premiums for life insurance held in the qualified plan.
56
Q

What is the formula for the exclusion ratio relating to the taxable portion of an annuity payment?

A

Cost Basis in the Annuity / Total Expected Benefit = Exclusion Ratio

57
Q

What 4 requirements must a lump-sum distribution from a qualified plan meet?

A
  1. The distribution must represent the employee’s entire accrued benefit in the case of a pension plan or the full account balance in the case of a defined contribution plan.
  2. A distribution of a participant’s entire accrued benefit or account balance must be made within one taxable year.
  3. The distribution must be on account of either the participant’s death, attainment of age 59 1/2, separation from service (does not apply to self-employed individuals in the plan), or disability,
  4. the employee must have participated in the plan for at least five taxable years prior to the tax year of distribution (waived if the distribution is on account of death).
58
Q

Explain 10-year forward averaging

A

Only possibly available for a participant born prior to Jan 2, 1936, under 10-year forward averaging the income tax due on a lump-sum distribution is calculated by dividing the taxable portion of the lump-sum distribution by 10 and then applying the 1986 individual income tax rates to the result (1/10th of the total taxable distribution). The result is then multiplied by 10 to determine the total income tax due on the distribution.

59
Q

Explain Pre-1974 Capital Gain Treatment.

A

Participants born prior to Jan 2, 1936 are also eligible to treat a portion of a lump-sum distribution attributable to pre-1974 participation in a qualified plan as long-term capital gain (taxable at 20%).
To calculate the portion that will be considered long-term capital gain, the total lump-sum distribution is multiplied by the ratio of the participant’s number of months of pre-1974 participation in a qualified plan to the total number of months of the participant’s plan participation. The portion remaining of lump-sum distribution is eligible for 10-year forward averaging, or is otherwise taxed as ordinary income.

60
Q

What is Net Unrealized Appreciation?

A

The excess of the fair market value of the employer securities at the date of the lump-sum distribution over the costs of the employer securities at the date the securities were contributed to the qualified plan. The tax treatment of NUA is that it will be taxed as capital gains rates instead of ordinary income tax as well as the deferral of recognition of the gain on the NUA portion until the distributed employer securities are sold.
Note - the portion of the lump-sum distribution attributable to the cost of the employer securities will be taxable as ordinary income.

61
Q

What are the two approaches that can be used to divide the benefit depending on the reason a QDRO is used?

A

Shared Payment Approach

Separate Interest Approach

62
Q

When would a distribution pursuant to a QDRO not be considered a taxable distribution to the third party alternate payee? 10% penalty?

A

As long as the assets are deposited into the recipient’s IRA or other qualified plan. Otherwise they will be subjected to tax at ordinary income rates on the value of the distribution.

The distribution would not be subject to the 10% penalty as it is one of the exceptions to the penalty.

63
Q

What are the characteristics of plan loans? 6

A
  • Qualified plans may permit loans up to the lesser of one-half of the vested plan accrued benefit up to $50,000.
  • If the vested accrued benefit is less than or equal to $20,000, then a loan is permitted up to the lesser of $10,000 or the vested accrued value.
  • Reduce maximum loan of $50,000 by maximum outstanding loan within the past year.
  • Loans are usually associated with 401k and 403b plans
  • Loans must generally be repaid within five years with an exception for loans associated with the purchase of a principal residence, which must be reasonable and could be as long as 30 years
  • Loan interest must be at a commercially reasonable rate and is paid back to the participant’s account with after tax dollars.
64
Q

What are the characteristics of plan loans when there is a failure to repay the loan or there is a termination of employment? 3

A
  • Many qualified plans treat an outstanding loan as a distribution from the plan and issue the participant a Form 1099R. The participant will then report this distribution as ordinary income, and it may be subject to the 10% early withdrawal penalty if the participant does not meet one of the exceptions.
  • A qualified plan may provide that the employee has a certain period of time to repay the loan after termination, or it will otherwise treat the loan as a distribution.
  • Finally, qualified plans may provide that the loan is simply an offset of the distribution, and this offset can either be treated as a taxable distribution or may be rolled over by the participant to another qualified plan.
65
Q

What are the exceptions to the 10% early withdrawal penalty in a qualified plan? 11

A
  • Distribution is made after the participant is age 59 1/2
  • Distribution is made on account of death of the
    participant.
    -Distribution is made on account of disability of the
    participant.
  • Distribution is made as part of substantially equal period
    payments made at least annually for life of life
    expectancy of the participant or joint lives of joint life
    expectancies of the participant and his designated
    beneficiary.
  • Distribution is made after separated from service after
    the participant attains age 55
  • Distributions are dividends paid within 90 days of the
    plan year from an ESOP
  • Distributions are made to pay certain unpaid income
    taxes because of a tax levy on the plan.
  • Distributions made to the participant for certain medical
    expenses paid during the year greater than 10% of AGI
  • Distributions are pursuant to a QDRO
  • Individuals called to active duty
  • Distributions to qualified public safety employees in
    governmental plans.
66
Q

In regards to the 10% penalty exception, what is considered disabled?

A

If they are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.

67
Q

What is rule 72(t)?

A

Substantially equal periodic payments, that are made at least annually for the life of life expectancy of the participant of the joint lives or joint life expectancies of the participant and his designated beneficiary, that will not be subjected to the 10% penalty. The payments must begin after the participant has separated from service. and to be considered substantially equal periodic payments, must be made by the RMD Method, Fixed Amortization Method, or Fixed Annuity Method.

68
Q

In one of what possible three ways must payments be made to be considered substantially equal periodic payments?

A
  • Required Minimum Distribution Method
  • Fixed Amortization Method
  • Fixed Annuitization Method
69
Q

For a QDRO exception to the 10% penalty, what must it relate to?

A
  • Child support
  • Alimony payments
  • Material property rights to a spouse, former spouse, child, or other dependent.
70
Q

What must a QDRO specify? 4

A
  • The name and last known mailing address of the participant and the name and mailing address of each alternate payee covered by the order
  • The amount or % of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or % is to be determined,
  • The number of payments or period to which such order applies, and
  • each plan to which the order applies.
71
Q

What types of accounts to RMDs apply to?

A 
Qualified plans
IRAs
403b plans
SEP
SIMPLE
457 plans

! Applies to Roth accounts in 401ks and 403bs

72
Q

When must the 1st RMD distribution be taken by? Subsequent RMDs?

A

April 1st of the year following the year the participants attains the age of 70.5
Subsequently they must be taken by December 31st of the tax year.

73
Q

What is an exception to the RMD rule for qualified plans?

A

If a participant is still employed by the plan sponsor of a qualified plan upon attainment of age 70 1/2. In this case the participant will need to take their first RMD on the April 1st of the year following the year they terminate employment with the plan sponsor.
-Not available to any participant that owns more than 5% of the ownership of the plan sponsor in the year the participant reaches the age 70 1/2.

74
Q

When would you not use the uniform lifetime tables to determine an RMD for a participant?

A

When the participant’s sole designated beneficiary is the participant’s spouse and that spouse is more than 10 years younger than the participant. In that case use the joint life expectancy table to calculate the RMD

75
Q

What type of accounts (if you have multiple of them) do you have to take RMDs from each one? Which can you aggregate them and take the RMD for all of them from one?

A

Qualified plans

IRAs

76
Q

What is a Qualifying Longevity Annuity Contract (QLAC)?

A

An annuity contract (that is not a variable annuity, equity indexed contract, or similar contract) that is purchased from an insurance company for an employee states that it is intended to be a QLAC and that satisfies the requirements.
Distributions from the annuity must begin no later than the specified annuity starting date nor after the owner turns age 85. Premiums for the QLAC can be exceed the lesser of $100,000 or 25% of the employee’s account balance under the plan.
If the QLAC satisfies these rules, the value of the contract is not considered for purposes of minimum distributions.

77
Q

How are RMDs calculated if the participant died after beginning to take minimum distributions if the beneficiary is not a spouse?

A

You use the designated beneficiary’s single life expectancy factor as determined on the last day of the year following the participant’s death. The factor is then reduced by one in each succeeding year to determine the required distribution amount.

78
Q

How are RMDs calculated if the participant died after beginning to take minimum distributions if the beneficiary is a spouse? What alternatives are available if the spouse happens to be the sole (primary) beneficiary?

A

The surviving spouse can receive distributions over their remaining single-life expectancy, recalculated each year based on the single life table. Distributions must begin in the year following the year of the participant’s death.

They may rollover the plan balance to their own account and wait until they attain age 70 1/2 to begin taking RMDs utilizing the uniform life table for their own life expectancy at that point.

79
Q

What factors are relevant to determine whether a spouse should rollover an inherited account into their own account? 6

A
  • If rolled over, the surviving spouse can name the beneficiary
  • If left intact as a qualified plan, the ERISA protection remains.
  • If rolled over to an IRA, ERISA protection is lost, but creditor protection is provided up to certain limits.
  • For a younger spouse leaving the account intact if distributions have begun will assure continuing cash flows. Doing so would be penalty free because otherwise they would have to wait until retirement to collect the funds penalty-free.
  • For a spouse older than the participant, leaving the account intact will allow the surviving spouse to stretch out the distributions.
  • For a younger spouse not needing the cash flow, they can rollover the account for continued deferral and the designation of a new beneficiary; thus creating the opportunity to stretch out minimum distributions far into the future.
80
Q

What options are available to an estate if a participant dies with a qualified plan that they had begun taking distributions from but the plan had no beneficiary?

A

The estate may take a full distributions of the account balance, or
Defer distributions from the plan to the RMD, which in the year of the participant’s death would be calculated as if they had not died and that factor is then reduced by 1 in every subsequent year.

81
Q

If a participant dies before the RBD, what options does a spouse beneficiary have? 4

A
  • Take a distribution of the account balance before the end of the fifth year after Matthew’s death.
  • Choose to roll the account balance to an IRA for their benefit. In this case, the RMD would begin when they attained age 70 1/2 and would be based upon their life expectancy as determined by the uniform life expectancy table. In addition, they could not take a distribution until age 59 1/2 without having the 10% penalty apply.
  • Elect to take distributions from the plan based on her recalculated life expectancy (single life expectancy table) each year. They may choose to begin distribution immediately or wait until the participant would have been 70 1/2.
82
Q

If a participant dies before the RBD, what options does a nonspouse beneficiary have? 3

A
  • Distribute participant’s account within 5 years.
  • Take distributions on the remaining single life expectancy (not recalculated) of the designated beneficiary (reduced by one year subsequently)
  • Roll plan to an IRA in the name of the deceased IRA owner for the benefit of the beneficiary and then distribute within 5 years or over the remaining single life expectancy of the beneficiary (not recalculated)
83
Q

If a participant dies before the RBD, what distribution options exist if there wasn’t a beneficiary?

A

Distribute participant’s account within 5 years.

84
Q

What is a stretch IRA?

A

An estate planning concept of minimizing distributions from an IRA so that tax deferred assets can grow as much as possible unimpaired from income tax. It occurs not only during the life of the owner, but also during the life of the beneficiary by reducing the amount of the RMDs.

85
Q

How is the objective of a stretch IRA achieved?

A

By choosing a very young beneficiary. Beneficiaries taking minimum distributions use the single-life table. The reduced RMD (vs with an older beneficiary), over time can be significant in allowing further tax deferred growth.as well as reducing the amount of tax paid on the earnings of previously distributed RMDs.

86
Q

What creditor protections are provided to retirement plans?

A
  1. All ERISA type retirement plans and rollovers from them to IRAs are exempt for an unlimited amount.
  2. SEP and SIMPLE IRAS are exempted up to an unlimited amount.
  3. Traditional and Roth IRAs are exempt up to $1,000,000, which is periodically adjusted for inflation.

Retirement (11 decks)

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