Retirement Planning- 5 Tax Treatment of Distributions of Various Types of Retirement Plans Flashcards
What does Net Unrealized Appreciation mean?
Net Unrealized Appreciation means to trade ordinary income taxation on retirement
assets for long-term capital gains treatment
At what age must RMDs be taken?
Must be taken by April 1st of the year following the year
in which owner/participant turns 72.
No longer 70 1/2
What is a beneficial strategy for retirement asset distribution under Internal Revenue Code 402(e)(4)
Net Unrealized Appreciation
What are the various methods for calculating RMDs?
Simplified calculation using the Uniform Table
– New tables took effect in 2022
and
Joint Life Expectancy Table
What kind of accounts does Net Unrealized Appreciation apply to?
Applies to employer securities held in a qualified
retirement plan (ESOP, pension, 401K, etc.)
Taking Withdrawals from
Retirement Accounts
may be subject to early withdrawal penalty unless?
Over age 59 ½
* Disabled
* Deceased (and distributed to a beneficiary)
* Paying for health insurance premiums for the unemployed
* College expenses for IRA owner or a dependent
* First-time homebuyer (subject to limits)
* Medical expenses >7.5% of AGI
* Qualified Birth or Adoption distribution
* For qualified plans only: Separation from service after age 55
* Substantially equal periodic payments
6
True or False: Net Unrealized Appreciation must elect lump sum, in-kind distribution from plan (total
distribution of all assets in single calendar year)
True
What is the formula to calculate RMDs?
Year End Account Value = RMD
________________________
Table Factor
True or False: Premature distribution penalty rules for qualified plans still
apply to Net Unrealized Appreciation
False: Premature distribution penalty rules for qualified plans still apply BUT only to original basis
What 2 years were RMDs waived?
2009
2020-COVID
True or False: There is no step up of basis on NUA portion at death
True
What does IRS Code Section 72(t): substantially equal periodic payments entail?
Provide access to qualified accounts prior to age 59 1/2
– IRAs
– Qualified plans (if allowed)
Depict the RMD Decision Tree
The IRS Code Section 72 (t) distribution must be taken for the longer of ______ years or until
age 59 ½?
5 years
What is the tax treatment of Net Unrealized Appreciation?
What are 3 methods to calculate 72T payments?
Annuitization
Amortization
Life expectancy
What is annuitization in the context of Rule 72 (t)?
Annuitization is the process that converts the money you’ve invested in an annuity into regular payments as part of your retirement plan. You can choose to spread the annuity payout over a specific period of time or across the rest of your lifetime.
The annuity method calculates a minimum SEPP withdrawal that remains fixed over the five-year period. It works by factoring your total account balance, an annuity factor provided by the IRS, the federal mid-term interest rate and the life expectancy of the owner of the account.
Are Traditional IRAs deductible or non-deductible?
deductible
What is ammortization in retirement planning?
An amortization policy is defined as the rules and processes that determine the length of time and the structure of payments required to systematically eliminate a funding shortfall, known as the unfunded actuarial accrued liability (UAAL).
Are Roth IRAs deductible or non-deductible?
non-deductible
Are withdrawals from Traditional IRAs taable or tax-free?
taxable
Are withdrawals from Roth IRAs taxable or tax-free?
tax-free
Are there lifeline RMDs in Traditional IRAs?
Yes
What is life expectancy?
The IRS publishes an annual table of life expectancy in which the account owner’s age corresponds to a life expectancy factor. The IRS revises this table every year, and the table is used to determine the RMD as the account balance of the owner is divided by the life expectancy factor from this table.
Are there lifeline RMDs in Roth IRAs?
No
Are there income limits for Traditional IRAs?
Only for deductibility
Are there income limits for Roth IRAs?
Yes
What is the contribution limit for Traditional IRAs and Roth IRAs?
2023: $6,500 (+1k catch-up)
Are there RMDs after death for Traditional and Roth IRAs?
Yes
Make the RMD calculations from IRA balance on 12/31 of the preceding tax year.
Make the RMD calculations from IRA balance on 12/31 of the preceding tax year.
Are there Early Withdrawal Penalties for Traditional and Roth IRAs?
Yes
What is amortization in the context of Rule 72(t)
-The amortization method determines yearly payment amounts by amortizing the balance of an IRA owner’s account over single or joint life expectancy
-develops the largest and most reasonable amount an individual can remove, and the amount is fixed annually
-To determine the annual amortization payment, select the appropriate life expectancy factor and federal mid-term rate, a special rate the IRS sets for various tax purposes.
What is the Life-Expectancy Method?
It is a way of calculating individual retirement account (IRA) distribution payments by dividing the balance or total value of a retirement account by the policyholder’s anticipated length of life. This method is used to calculate RMD amounts from accounts such as traditonal IRAs and 401(k)s.
What are the two types of Life-Expectancy Method?
the term-certain method and the recalculation method.
What is the term-certain method?
This method includes distribution or withdrawal from the retirement account is based on life expectancy at the time of the first withdrawal. With each following year, the account is steadily depleted as life expectancy reduces by one year. The retirement account will eventually be empty once you reach your life expectancy age.
What is the recalculation method?
This method recalculates life expectancy every year to offset the risk of outliving annuity payments. With this method you are withdrawing as little as possible amounts.
