Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

will pay a 43.4 percent (39.6 + 3.8) tax on investment income beginning at about $12,500 of taxable income in 2017.

When does a “distribution” occur?

For purposes of the income tax Code, when are funds considered “distributed” from a retirement plan or IRA? When the plan administrator cuts the check, mails the check, or deducts the amount from the participant’s account on its books? When the participant or beneficiary requests the distribution, receives the check, or negotiates the check? What if the check is payable to another retirement plan (transfer or direct rollover) but is delivered to the participant? The date a distribution occurs matters for purposes of determining the deadline for completing a 60-day rollover ( ¶ 2.7 ) as well as when the distribution is includible in the recipient’s gross income. If a check payable to the participant is received by the participant, there definitely has been a distribution. See, e.g. , PLR 2004-42035, ruling there was a distribution because the employee had received the check from the plan, even though she had not cashed it. Beyond that obvious point there are no cases or rulings pinpointing when a distribution occurs. If a plan administrator or IRA provider files Form 1099-R, reporting to the IRS and the participant or beneficiary that a distribution occurred in a particular year, the participant or beneficiary will need to acknowledge that fact on Form 1040 or 1041 for the applicable year— even if claiming that there really was no distribution or that the distribution was not taxable— because otherwise the IRS will come calling when it tries to match the 1099-R with the income tax return of the recipient of the supposed distribution. Generally, a participant or beneficiary is taxable on QRP, IRA, or 403(b) benefits only if, as, and when such benefits are actually distributed . ¶ 2.1.01 . In contrast, see § 402(b)(2) , dealing with tax treatment of distributions from “nonexempt” (nonqualified) employee benefit plans, providing that the employee is taxed on amounts “actually distributed or made available ” under the plan. Emphasis added. (If a QRP ceases to be qualified under § 401(a), income taxation would cease to be governed by § 402(a) , with results beyond the scope of this book.) Actual distributions and deemed distributions Here are exceptions to the general rule—events that cause a participant or beneficiary to be currently taxable on retirement benefits without an actual distribution: A. Pledging an IRA as security for a loan. “If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual.” § 408(e)(4) (emphasis added); Reg. § 1.408-4(d)(2) . The IRS has allowed an exception to this rule for a pledge of IRA assets to secure a former employee’s obligation to repay a pension plan distribution under certain circumstances; PLR 2006-06051. B. Other assignments, pledges, or transfers. Generally, assigning, pledging, or transferring an IRA or other retirement plan to another person causes a deemed distribution of the account. See ¶ 5.8.06 (C); § 72(e)(4)(A)(ii) ; Regs. § 1.408-4(a)(2) , second sentence, and § 1.408A-6 , A-19; and Coppola v. Beeson , 419 F. 3 rd 323 (5th Cir. 2005) (participant’s