Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

A. Roth plans.................................................................................................................110 B. Tax-free rollovers and transfers ..............................................................................110 C. Life insurance proceeds, contracts..........................................................................110 D. Recovery of basis.....................................................................................................110 E. Special averaging for lump sum distributions .......................................................110 F. Net unrealized appreciation of employer securities (NUA) ..................................110 G. No tax on distribution of annuity contract .............................................................111 H. Return of IRA contribution .....................................................................................111 I. Income tax deduction for certain beneficiaries ......................................................111 J. Distribution to charitable entity ..............................................................................111 K. Qualified Health Savings Account Funding Distributions....................................111 L. QDROs and divorce-related IRA divisions............................................................111 Plan loans: Income tax treatment, RMDs, etc. ..................................................................111 Excess IRA contributions; corrective distributions............................................................113 Distributions made in error: Wrong amount, person, etc. ................................................117 2.2 I F THE P ARTICIPANT H AS A FTER - TAX M ONEY IN THE P LAN OR IRA ....................................118 Road Map: Tax-free distribution of participant’s “basis” .................................................118 General rule: The “cream-in-the-coffee rule” of § 72........................................................119 Participant’s basis in a QRP or 403(b) plan .......................................................................119 QRP distributions from account that contains after-tax money ........................................120 Partial and split rollovers, conversions: QRP distributions ..............................................123 A. Introduction: Please read this first. .........................................................................123 B. Part direct rollover to Roth IRA, part direct rollover to traditional IRA. ............124 C. Part outright distribution, part direct rollover into any IRA(s) .............................125 D. Distribution outright to participant followed by one or more 60-day rollover(s)125 E. Direct rollover into multiple traditional (or Roth) IRAs .......................................127 F. How these options apply to QRP beneficiaries......................................................128 G. Effective date and retroactivity of Notice 2014-54 ...............................................128 Participant’s basis in a traditional IRA ...............................................................................128 Beneficiary’s basis in an inherited IRA ..............................................................................129 How much of a traditional IRA distribution is basis?........................................................130 A. The cream-in-the-coffee formula............................................................................130 B. Distribution Amount................................................................................................130 C. Year-end Account Balance .....................................................................................131 D. Total Nondeductible Contributions ........................................................................132 E. Outstanding Rollovers .............................................................................................132 F. The aggregation rule: Which IRAs must be aggregated .......................................132 G. Cream-in-the-coffee formula: Examples................................................................133 Exceptions to the cream-in-the-coffee rule for IRAs.........................................................134 Partial rollovers and conversions: IRA distributions ........................................................134 2.3 I NCOME T AX W ITHHOLDING ...................................................................................................135 Withholding of federal income taxes: overview ................................................................135 Periodic, nonperiodic, and eligible rollover payments ......................................................136