MODULE 7 DESIGNING OPTIMAL RETIREMENT INCOME STREAMS Flashcards
SOME QUALIFIED PLANS PROVIDE FOR IN-SERVICE WITHDRAWALS BY PLAN PARTICIPANTS.
WHICH TYPE OF QUALIFIED PLANS MAY PERMIT WITHDRAWALS BEFORE THE PARTICIPANT HAS REACHED AGE 62?
(1) profit sharing plans/stock bonus
(2) thrift/savings plans
may include provisions for in-service w/d by plan participants who are younger than age 62
WHICH PLANS TYPICALLY INCLUDE PROVISIONS FOR W/D’S BY PLAN PARTICIPANTS WHO ELECT TO CONTINUE WORKING PAST THE PLAN’S NORMAL RETIREMENT AGE?
defined contribution plans typically allow w/d’s by participants who continue to work past the plan’s normal retirement age. theoretically, defined benefit plans can do the same, but the record-keeping complexity resulting from these w/d’s discourages most from doing so.
WHICH PLANS TYPICALLY PROVIDE FOR HARDSHIP W/D’S? DESCRIBE CIRCUMSTANCES THAT JUSTIFY SUCH W/D’S.
generally available for the following 3 plans:
(1) TSA
(2) profit sharing plans
(3) 401(k) plans
participant must demonstrate an IMMEDIATE AND HEAVY FINANCIAL NEED and a LACK OF REASONABLY AVAILABLE RESOURCES
may also be allowed for:
(1) medical expenses
(2) tuition payments
(3) purchase of a primary residence
(4) payments to prevent eviction from one’s home
QUALIFIED PLANS & TSA’S MAY PERMIT PARTICIPANTS TO BORROW FROM THEIR ACCRUED BENEFITS.
WHAT IS THE MAXIMUM REPAYMENT PERIOD FOR SUCH LOANS?
no more than 5 years, except in the case of loans used to acquire a principal residence.
QUALIFIED PLANS & TSA’S MAY PERMIT PARTICIPANTS TO BORROW FROM THEIR ACCRUED BENEFITS.
WHAT HAPPENS IF LOANS ARE NOT REPAID W/IN THE ALLOWED PERIOD?
loans that are not repaid w/in the specified period are treated as taxable distributions (& may come w/ a penalty)
WHAT ARE TWO ALTERNATIVE PAYMENT OPTIONS GENERALLY AVAILABLE TO RETIRED AND TERMINATED PARTICIPANTS IN QUALIFIED RETIREMENT PLANS?
two forms of benefit payment generally offered to plan participants are:
(1) a lump sum distribution of the entire benefit, or
(2) a series of periodic payments (an annuity or series of installments)
WHAT IS THE NEGATIVE ASPECT OF TAKING A LUMP SUM DISTRIBUTION?
the entire sum must be recognized as taxable income in the year in which it is received.
the magnitude of the tax liability can be mitigated to some degree through the use of forward averaging
EXPLAIN THE TAX BENEFIT OF ROLLING OVER A LUMP SUM DISTRIBUTION. WHAT IS THE NEGATIVE TAX ASPECT OF THIS OPTION?
if properly executed, it defers taxation of the lump sum until such time as it is distributed from the IRA or other retirement plan into which it was rolled.
the negative aspect (except in the case of a conduit IRA) is that it may eliminate the opportunity for forward averaging
FORWARD AVERAGING
a method of calculating taxes on a lump sum distribution that may result in a lower rate than would otherwise apply.
EXPLAIN AN INDIRECT ROLLOVER.
an indirect IRA rollover is one in which the plan participant takes receipt of the retirement plan distribution, and within 60 days, places it into an IRA or other retirement plan.
DESCRIBE AN IMPORTANT NEGATIVE ASPECT OF THIS INDIRECT APPROACH TO HANDLING A LUMP SUM DISTRIBUTION
the indirect IRA fulfills the purpose of the rollover; however, the IRC requires the plan administrator to withhold 20% of the initial qualified plan or TSA distribution for tax purposes
HOW CAN THE NEGATIVE ASPECT OF THE INDIRECT ROLLOVER BE AVOIDED?
by using a DIRECT rollover. in this type of rollover, no funds are withheld for taxes.
ID 7 EXCEPTIONS STATED IN THE IRC TO THE TAX PENALTY ASSESSED AGAINST DISTRIBUTIONS TAKEN BEFORE 59 & 1/2
7 exceptions to the 10% premature distribution penalty are:
(1) plan participant dies and distribution goes to a bene or participant’s estate
(2) attributable to permanent disability
(3) part of a series of substantially equal periodic payments made over the plan participant’s life expectancy or joint life expectancy of the participant & spouse (or bene of an IRA)
(4) distributions are made @ separation from service at age 55 or older (not applicable to IRA)
(5) distribution is made to a former spouse/dependent under a QDRO (not applicable to IRA; IRA assets can be transferred w/o penalty to the IRA of a former spouse when it is ordered in a DIVORCE DECREE)
(6) distributions do not exceed the amount of participant’s deductible medical expenses for the tax year (over 7.5% AGI)
(7) in 2020 and later, up to $5,000 per event per parent can be taken from an IRA or employer retirement plan after the birth or adoption of a child under 18
also, qualified education expense distribution from an IRA are not subject to the penalty.
distributions from an IRA or Roth IRA would also be exempt from the 10% penalty if used by first-time homebuyer expenses, up to the $10K lifetime cap
WHAT IS THE REQUIRED DEADLINE FOR THE COMMENCEMENT OF DISTRIBUTIONS FROM QUALIFIED PLANS, IRA’S, SEP’S, TSA’S AND OTHER RETIREMENT ACCOUNT?
the deadline for taking RMDs for 2020 and later is APRIL 1ST of the year FOLLOWING THE YEAR IN WHICH A PLAN PARTICIPANT ATTAINS AGE 72.
**for a common-law participant (a participant who does NOT own 5%+ of the company) in a qualified plan, the RBD is April 1st of the year following the later of attaining age 72 or retiring from the company.
WHAT DOES THE TAX CODE REQUIRE IN TERMS OF RMDs ONCE THE PLAN PARTICIPANT HAS ATTAINED AGE 72 IN 2020 AND LATER?
the tax code has specific rules about how much must be distributed of the RMD. they are:
(1) amounts in the plan must be taken over a period of time that does not exceed the participant’s life expectancy under the UNIFORM TABLE (TABLE III)
(2) the amounts in the plan must be taken over a period of time that does not exceed the joint life expectancy of the plan participant and the spouse using the JOINT AND LAST SURVIVOR TABLE if the spouse is 11 or more years younger than the participant
life expectancy is based on an IRS table. formula for calculating RMD is:
RMD = (account balance of 12/31 of prior year) divided by (life expectancy based on Uniform Table)
WHAT IS THE DEFAULT DISTRIBUTION OPTION FOR THE MARRIED PARTICIPANT OF A DEFINED BENEFIT PLAN? EXPLAIN WHAT IS REQUIRED TO CHANGE IT.
married participant in a defined benefit plan will automatically be given a joint and survivor annuity as a distribution option. this provides a fixed life benefit for the retiring participant, and a reduced benefit for their survivor. the plan participant cannot unilaterally cut the spouse out of this benefit. if another distribution option seems to be more appropriate, the spouse must give their written consent to the change.
QUALIFIED PRERETIREMENT SURVIVOR ANNUITY (QPSA) VS. QUALIFIED JOINT SURVIVOR ANNUITY (QJSA)
defined benefit, money purchase, cash balance & target benefit plans must provide a QPSA to the spouse of a plan participant who dies PRIOR to retirement. the payment to the surviving spouse is equal to at least 1/2 of the participant’s actuarially reduced pension benefit as of the date of death/the earliest retirement date from the plan
a QJSA is mandated in defined benefit plans and continues payments to the surviving spouse of the plan participant who has died AFTER leaving service
surviving spouse has the option to waive the benefit
WHAT ARE THE DISTRIBUTION OPTIONS OF THE BENE WHEN AN IRA OWNER DIES DURING RETIREMENT OR AFTER THEIR RBD?
if a surviving spouse is the sole eligible designated bene, their RMD period is the greater of their recalculated life expectancy factor (using the Single Life Table) or the deceased IRA owner’s remaining actuarial life expectancy (using the Single Life Table and then subtracting one for each subsequent year)
for example, let’s assume the surviving spouse:
- chooses not to roll the account into their own IRA
- is the sole eligible designated bene
- elects to take RMD over their life expectancy
a spousal bene is uniquely able to roll a lump sum distribution from the deceased’s plan into an IRA in the surviving spouse’s name.
if an individual other than the spouse is the eligible designated bene, the required distribution period is the greater of the eligible designated bene’s life expectancy (using the Single Life Table and then subtracting one for each subsequent year) or the dcsd IRA owner’s remaining actuarial life expectancy (using the single Life Table for the decedent and then subtracting one for each subsequent year)
