Retirement Plans And Taxation Flashcards
Defined Contribution Plan
- Qualified plan
- Separate account for each employee and benefit based on contributions/earning in account
- Has cash value today that’s easy to quantify
- QDRO required
Defined Benefit Plan
- Qualified Plan
- Obligates employer to pay specific pension to employee upon retirement
- Interest is derived from the amount of pension promised to each employee upon retirement
- No cash value today
- QDRO required (except some government plans do not)
IRA
- Not qualified
- Accounts set up at custodial for individual to save for retirement- with tax free growth (Roth) or on a tax-deferred basis (traditional)
IRC 1041
TRANSFER of spouse interest in retirement plan as part of division of marital property is NOT taxable
Are distributions pursuant to divorce taxable?
Yes
If employer securities, tax on unrealized appreciation is deferred until sale otherwise ordinary income
Distributions from Qualified Plan
Mandatory 20% withholding unless it’s a direct rollover
Not applicable to IRAs
IRC 72 T 2 C
Non-participant spouse can receive DISTRIBUTIONS from QUALIFIED PLAN pursuant to a QDRO without 10% penalty (subject to ordinary income)
They have to take cash before 401k changed hands to escape penalty
Methods of transferring IRAs
Change owner’s name on IRA (if full transfer)
Trustee to Trustee (60 day rule applies)
Rollover (60 day rule applies)
IRA- Avoid 10% penalty rules
Equal periodic payments for 5 years
OR
Until 59 1/2
Whichever is longer
ERISA Defined Contributions- Exceptions to 10% Penalty
- Death
- Disability
- Distributions for medical/qualified higher education
- Distributions in form of annuity payments for life expectancy
- Distributions made to ex-spouse pursuant to QDRO (IRC Section 72 T 2 C)
Methods of Dividing a Pension
- Present Value of cash out method
- Deferred Division of Future Share Method
- Reserved Jurisdiction
Present Value of Cash Out Method
Method of Dividing a Pension
Non-employee paid lump sum settlement or receives assets equal to their interest
Deferred Division of Future Assets
Method of Dividing a Pension
No present value determined. Spouse is awarded share of benefit if and when paid
Reserved Jurisdiction
Method of Dividing a Pension
Court retains the authority to order distributions from pension in future- LAST RESORT
Coverture Fraction
Method in pension valuing and defined contribution to show percentage of plan spouse has access to
number of years married / total years worked until retirement
OR
years working while married x pension amount until divorce
Inflation Adjusted ROR
(1+ discount rate) / (1 + inflation rate) - 1 x 100
Public Employee Pension
WON’T ALLOW division by QDRO (exception because it is a qualified defined benefit plan)
In some states, assets not assigned to ex-spouse at all
Vesting Schedules
5 Year cliff vest
3-7 year graded vesting: 20% more per year
- Year 3 = 20%
- Year 4 = 40%
- Year 5 = 60%
- Year 6 = 80%
- Year 7 = 100%
Mature Plan
Employee may be fully vested but may have to wait until reaching a certain age to get benefits
Ex: some companies do not pay out benefits until employee is age 60 or 65
In some cases, if employee isn’t vested in plan and dies before retirement age, benefits are lost
When must the PV of pension be calculated based on?
Earliest year of retirement without penalty
Who are QDRO Distributions taxable to?
If child support (usually arrears)- taxable to participant
If marital division- taxable to alternate payee
If alimony- not taxable income to payee
Plans Divisible by QDRO
- Defined Contribution Pension Plans
- Defined Benefit Pension Plans
- 401ks
- Thrift Savings Plans
- Some profit sharing and money purchase plans
- Keogh plans
- Tax Sheltered Annuities
- ESOPs
- Old PAYSOPs
Methods to Determine Amount Paid to Alternate Payee QDRO Pension
- Stated %
- Stated $
ERISA
Employee Retirement Income Security Act of 1974
Established laws relating to attachment of pension benefit
Family court confused about how to treat plan assets that state courts said were marital property
