Distribution Of Qualified Plans Flashcards
Pension Plan in-service distributions
allowed after age 59 1/2
Profit sharing plan in-service distributions
in-service withdraws allowed after 2 years
In a pension plan If termination occurs before the normal retirement age, a participant can opt to
take a lump sum
3 options for handling lump sums in pension plans
- rollover into IRA
- leave assets where they are if greaterthan 5k
- EE can purchase a QPSA (qualified pre-retirement spousal annuity)
What does a QPSA - Qualified Pre Retirement Spousal Annuity do?
provide annuity retirement benefit to surviving spouse if the participant dies before NRA
In a pension plan, if termination occurs at Normal Retirement Age, the Participant has 3 options
- take a lump sum roll into IRA
- waive QPSA, and convert the pension plan to a single life annuity
- choose a QJSA - Qualified joint survive annuity
What does a QJSA do
pays an annuity to a spouse as long as one is still surviving
profit sharing 401k plans allow
loans
In a profit-sharing plan, when terminated an EE has 4 options
- lump-sum distribution
- roll over funds to an IRA
- purchase an annuity
- take incremental distributions
Taxing on Distributions
taxed as ordinary income (income tax)
exempt from payroll tax
Taxes on distributions are exempt when
- rolled into IRA
- put into an annuity
- is a specific lump sum dist
- is a QDRO-qualified domestic relations order
Advantages of rolling over into IRA
dist from one qualified plan to another has no 20% withholding for taxes
Disadvantages of rolling over into an IRA
loss of erisa protection
loss of net unrealized appreciation
direct rollover into IRA is
distribution from one qualified plan to an IRA - no 20% withholding
indirect rollover into IRA is
distribution from a qualified plan made to a participant to deposit within 60 days - 20% withholding is mandatory
Types of distributions
- net unrealized appreciation
- in plan Roth rollover
- traditional IRA converted to Roth IRA (back door Roth)
- distribution as an annuity
- QDRO
How many rollovers are permitted a year?
one
Net Unrealized Appreciation Distribution
- if a 20k stock grows to 100k at retirement, the unrealized gain of 80k is taxed as long term cap while the 20k is taxed as income.
- benefit - avoid income tax on gains (long term cap tax is less)
In plan Roth Rollover Distribution
- allows participant to transfer funds from qualified plan to a roth acct
- benefit - pay tax once, acct grows without tax, can distribute without tax
- best used when taking a gap yr or expecting reduction in income
Trad IRA convert t o ROTH (Back Door Roth) Distribution
- used for indiv. with higher income, if they foresee tax brackets changing for the worst.
- useful to those who have income that’s too high to qualify for a Roth
- executed by depositing $ that you already paid tax on into a traditional IRA and then transferring that to a Roth IRA
Annuity Distribution
removes the risk of running out of funds when reaching retirement.
- is a regular annual or monthly distribution that is intended to last until retirement
QDRO Distribution
- applies only to contributions made after marriage
- a judge ordered the separation of assets between spouses if the marriage ends
- distributions are penalty and tax-free if deposited into IRA or qualified plan
Plan Loans are when
a participant borrows from their plan and pays themself back after tac with interest (typically only allowed in 401k)
The maximum loan amount is the lesser of
50,000 or 1/2 the vested plan balance
If a plan has less than 20,000, then the maximum loan amount is the lesser of
10,000 or the vested account balance
While a loan is outstanding
it is not invested in the market
loan period length
5 yrs
Or 30 yrs (if invested in purchase of house)
What is the penalty for taking a loan?
10% early withdraw fee
Penalties for taking a loan can be waived IF
- participant is > 591/2
- participant dies/disabled
- participant seperates from service after age 55
- QDRO
- loan is a div from ESOP
- participant called to active duty
- loan used for medical expenses > 7.5 % of AGI
- participant is a public safety EE > age 50
- loan used for birth/adoption
72t Loan
- waived penalty for taking loan but income taxes are paid on the distributions.
- this plan offers equal payments periodically, once the distributions start they never stop.
Birth and Adoption Loan
permits distributions of 5k per child per taxpayer
subsidizes cost of maternal/paternal care, distributions can be made up to 1 yr after birth or adoption
Participants in a qualified plan are required to take minimum distributions by
april 1 of the year they turn 70 1/2
(ensures participants pay taxes)
Calculate Req Min Distribution
fair market value / distribution factor
- distribution factor is based on actuarial determined life expectancy and using tables
What table do you use if spouses are > 10 yrs apart
joint and survivor table
what table do you use to find dist. factor
uniform life table / single life table
