Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

didn’t authorize, know of, or benefit from the withdrawals, he was not the “payee or distributee” of the IRA withdrawals under § 408(d)(1) and therefore was not liable for the income tax or penalty on them. However, the Roberts result is the opposite of the “community property” IRA rulings that appear to make the IRA participant and designated beneficiary taxable on distributions, even those paid to a spouse under community property laws; see ¶ 2.1.05 .

2.2 If the Participant Has After-tax Money in the Plan or IRA

This ¶ 2.2 explains how to determine how much basis (after-tax money) a participant or beneficiary has in a traditional qualified retirement plan (QRP) or IRA, how much of such basis is deemed included in any particular distribution, and what happens if a distribution that includes some basis is rolled over to more than one plan or IRA or is only partly rolled over . See the “Road Map” in ¶ 2.2.01 . To answer the same questions with respect to a Roth IRA (or designated Roth account (DRAC)), see ¶ 5.2.06 (or ¶ 5.7.05 ). For the effect of UBTI on basis, see ¶ 8.2.01 . For what happens if the total combined value of the participant’s IRAs is less than the amount of his basis, see ¶ 8.1.02 . For how the distribution of after-tax money interacts with the minimum distribution rules, see ¶ 1.2.02 (D). Basically, you figure out how much of any particular distribution is after -tax money using the rules in this ¶ 2.2 ; then that distribution counts fully towards the RMD requirement just like any other distribution. If the amount distributed exceeds the RMD, after-tax money is applied first to the RMD. A retirement plan distribution is nontaxable to the extent it represents the recovery of the participant’s “investment in the contract.” § 72(b)(2) . The “ investment in the contract ” is the money in the plan that the participant has already paid income tax on. For ease of reference, it is usually called the participant’s “ basis ” or “ after-tax money ” in the plan or IRA. There is no double taxation; the participant is not taxed again when he takes that after-tax money out of the plan or IRA. The pretax money is the money inside the plan or IRA that has not yet been subjected to income tax (including any earnings that have accrued, inside the plan, on the after-tax money). Unfortunately, there is no quick easy way to explain the rules that govern after-tax money in a plan or IRA. There is a general rule with numerous exceptions, and there are different rules (and different exceptions) for plans than for IRAs. Here is your Road Map for Tracking Basis: Step 1: How much basis does the participant have? To determine the participant’s basis in a QRP, see ¶ 2.2.03 . To determine the participant’s basis in his traditional IRAs, see ¶ 2.2.06 . To determine a beneficiary’s basis in inherited IRAs, see ¶ 2.2.07 . Step 2: How much of a particular distribution is basis? See ¶ 2.2.04 to determine how much of any particular distribution from a QRP is deemed to be after -tax money. See ¶ 2.2.08 to Road Map: Tax-free distribution of participant’s “basis” Note: Basis is another word for the technical term “investment in the contract.”