Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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Distribution Amount is the sum of all “countable” distributions the participant took from any of his traditional IRAs during the calendar year, because all such distributions are treated as one single giant distribution. Each distribution is valued as of the date it is distributed. Any amount converted to a Roth IRA is treated as a distribution, and valued for this purpose on the date it is distributed out of the traditional IRA. Notice 87-16, Part III. Use IRS Form 8606 and its instructions and related worksheets to compute the Distribution Amount. Here are some points to consider (including which distributions “don’t count”):

 Since all of the participant’s traditional IRAs are treated as a single account, make sure you are looking at the right IRAs in figuring the Distribution Amount; see “F.”

 IRA distributions that were rolled over to another traditional IRA or QRP are NOT included in the Distribution Amount. IRA distributions that were rolled to another traditional IRA don’t count because they will show up in the Year -end Account Balance. IRA distributions that were rolled into a QRP don’t count because such rollovers were deemed to come out of the pretax money in the account only (see ¶ 2.2.09 (A)); accordingly, they simply reduce the pretax money in the IRA without diminishing basis.  There are other IRA distributions deemed to come entirely from the pretax money in the participant’s aggregated IRAs; see ¶ 2.2.09 (B)–(D). For the formula to work, these excepted distributions must be excluded from the Distribution Amount. Notice 87-16 does not mention these exclusions because these exceptions did not exist in 1987, but they are described in the Instructions for IRS Form 8606 (2016), line 7, p. 8.

 Exclude any distribution that was rolled into a Roth IRA (conversion) during the year, if that conversion amount is later recharacterized (¶ 5.6) ; see “C.”

C. Year-end Account Balance. This is the total combined account balance of all of the participant’s countable traditional IRAs (for countable and excluded accounts see “F”), computed as of the end of the year in which the distribution occurs. § 408(d)(2)(C) . Use IRS Form 8606 and its instructions and related worksheets to compute the Year-end Account Balance; here are some points to consider:

 There are special rules for returned contributions (both regular and excess), and for various disaster recovery assistance distributions. See Instructions for Form 8606.

 Recharacterizations of contributions made to any IRA for that year are taken into account, even if the recharacterization occurred after the end of the year. If the recharacterization occurred during the same year as the distribution/conversion, the recharacterized amount “automatically” is included in the Year-end Account Balance. If the recharacterization occurs after the end of the year, the amount that was transferred into the IRA after the end of the year to effect the recharacterization