Distribution rules, alternatives, and taxation

Question 1

What are the conversion rules from a 529 plan to a Roth IRA?

Answer 1

Allowed for unused 529 balances up to a lifetime limit of $35,000 must have existed for 15 years

Question 2

Premature distributions are allowed for what three situations?

Answer 2

Providing that the plan document allows: the situations are attainment of a specific age or years of service, hardship, or attainment of age 62 for defined benefit plans

Question 3

Hardship withdrawals from profit-sharing plans in stock bonus plans?

Answer 3

Subject to ordinary income tax and the 10% early withdrawel penalty

10% penalty will not apply if the distribution qualifies under the 59 1/2 rule or disability qualified plan exemptions

Question 4

What is a hardship distribution considered and what are they allowed for?

Answer 4

Considered a safe harbor distribution

Allowed for the following:

1. Medical expenses for the participant, participant spouse or dependent
2. Tuition, room and board, and other educational expenses for the next 12 months for the post secondary education for the participant, participant spouse, or dependent
3. Purchase of principal residence
4. Prevent eviction foreclosure of mortgage of principal residence
5. Funeral expenses
6. Certain expenses relating to the repair of damage to the employees principal residence
7. Cannot be in excess of the immediate need

Question 5

What is the tax penalty for substantially equal payments 72t, if it is broken under the five years

Answer 5

10% additional tax is applied retroactively to all payments received before 59 1/2

Question 6

What are the simple IRA rollover rules?

Answer 6

A receiving simple IRA has to have been established at least two years prior to receiving funds from a non-simple plan

Tax and penalty free distributions from simples may now be rolled into qualified plans and IRAs, but only if the simple has been maintained for two years from its start date

Question 7

Direct transfers of qualified plans rules?

Answer 7

Participant receives a direct distribution from a qualified plan. The distributing plan must withhold 20% of the distribution.

To ensure no 20% withholding, rollover’s must be completed by means of a direct transfer also called trustee to trustee or a direct rollover

Question 8

What are the required beginning date distributions for IRAs, SEPs, SARSEP, and simples?

Answer 8

Required beginning date is April 1 of the year following the year in which the covered individual attained age 73

Subsequent distributions must be made by December 31 of each year thereafter

Question 9

What are the required begin date for qualified plans, governmental 457 plans and 403bs?

Answer 9

Participants in qualified plans this includes 401(k)s, government 457 plans and 403 who are still working and not 5% or greater owners may delay their RBD until April 1 the year following retirement

A more than 5% owner must take RMD’s the year after turning 73, they may continue to contribute to their plan until they retire

Question 10

What is the exception for joint life distributions of RMD calculations?

Answer 10

Exception is available if the employees sole beneficiary is the employee spouse, and the spouse is more than 10 years younger than the employee

Employee is permitted to elect the longer distribution period measured by the joint life and the last survivor life expectancy of the employee and spouse

Question 11

What is the penalty imposed on an RMD distribution that falls short of the minimum required?

Answer 11

25% excise tax or 10% if the RMD is taken by the end of the second year following the year it was due

Question 12

What is the qualified charitable distribution (QCD) from an IRA?

Answer 12

Individuals ages, 70 1/2 or older may make a qualified charitable distribution of up to $100,000 annually

Is excluded from taxable income

Satisfies RMD requirements

No charitable income tax deduction is available

Question 13

Inherited IRAs require that the entire balance of the participants account be distributed within 10 years, what are the five exceptions to the rule that are called eligible designated beneficiaries EDBs

Answer 13

Owner surviving spouse

Owner’s child who was less than 18 years of age; once they reach age of 18 the 10 year rule goes into effect, must withdraw all funds from inherited IRA by the 10th year following their 18th birthday

Disabled individual: disabled individual is allowed to use their own life expectancy to calculate RMD’s

A chronically ill individual

Any other individual who is not more than 10 years younger than the deceased owner

Question 14

Participants in a 401(k) plan who retired between the ages of 55 and 59 1/2 may take withdrawals directly from their 401(k)s without paying what?

Answer 14

10% early withdrawal penalty this is not available for IRAs

Question 15

What is the special penalty waiver rule for public service employees?

Answer 15

Penalty free distribution from governmental plans not 457 plans for qualified public safety employees are available at age 50 and older

Public safety employees include law-enforcement, customs and border, patrol officers, and firefighters and air traffic controllers

Question 16

What is net unrealized appreciation (NUA)?

Answer 16

It is available with contributed stock from an employer in a qualified plan

1. When the stock is distributed, the basis is taxed as ordinary income
2. The difference between the market value and the basis is not taxable until the stock is sold and is treated as long-term capital gain
3. Any amount of growth above the distribution total or market value will either be short term or long-term capital gain when sold at a later date

Question 17

If you work beyond age 73 when is the latest you can take a distribution and not be penalized?

Answer 17

If you’re not a 5% or more owner

Than by April 1 of the year after you retire

Question 18

A QDRO applies to what kind of plans?

Answer 18

Qualified plans, 403b, government 457 plans but not IRAs