Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

The amount of gross income Ted must report is therefore $46,000 ($50,000 conversion minus $4,000 basis allocated to the conversion). His remaining basis in his traditional IRA is $36,000 ($40,000 total basis, less $4,000 used up in the conversion).

Exceptions to the cream-in-the-coffee rule for IRAs

There are several exceptions to the proportionate allocation, cream-in-the-coffee, all-IRAs- aggregated, scheme described at ¶ 2.2.08 : A. IRA-to-nonIRA-plan rollovers. Amounts transferred from an IRA to a qualified plan are deemed to come out of only the pretax money in the participant’s IRAs. This exception creates a planning opportunity for some IRA owners. See ¶ 2.2.10 (A). B. Return of IRA contribution before tax return due date. Certain returned IRA contributions are taxed outside the § 72 “system.” See ¶ 2.1.08 (D), (F), (G). C. QHSAFDs. A Qualified Health Savings Account Funding Distribution ( ¶ 2.1.06 (K)) is deemed to come entirely from the pretax money in the individual’s IRAs until the pretax money is exhausted. § 408(d)(9)(E) . D. Qualified Charitable Distributions. Another exception is for “Qualified Charitable Contributions” (QCDs). A QCD is the distribution of up to $100,000 per year from the IRA(s) of an individual who is over age 70½ directly to an eligible charity; see ¶ 7.6.07 . A QCD is deemed to come first out of the pretax portion of the individual’s IRA. § 408(d)(8)(D) . This section explains how basis is apportioned in the case of a partial rollover or partial Roth conversion of an IRA distribution, including how to roll pretax money “upstream” from an IRA to a qualified plan in order to effect a tax-free Roth conversion (or distribution) of the after- tax money in the IRA. A. IRA-to-nonIRA plan rollovers. When a distribution from a traditional IRA is transferred directly into a QRP or 403(b) plan, the transferred amount is deemed to come first out of the taxable portion of the traditional IRA distribution. § 408(d)(3)(H) (applicable to years after 2001). This rule is necessary because the nontaxable portion of an IRA cannot legally be rolled into a QRP or 403(b) plan. ¶ 2.6.02 (H). This exception creates the opportunity for a tax-free distribution or Roth conversion from a traditional IRA. To accomplish either, the participant must (1) have after-tax money in his IRA(s) and (2) be a participant in a qualified plan that accepts rollovers. Someone who has those two characteristics can send all the pretax money from the IRAs to the qualified plan via trustee-to- trustee transfer, leaving only the after-tax money in the IRA. He can then distribute the IRA to himself tax-free or convert the IRA to a Roth IRA tax-free. Rev. Rul. 2014-9, 2014-17 IRB 975, Situation 2, explains how to carry out this type of rollover: “Employee A has an account balance in IRA N, which is titled ‘IRA of Employee A.’ IRA N is a traditional IRA within the meaning of § 1.408A-8 , Q&A-1(a)(2) (rather than a Roth IRA or a SIMPLE IRA as described in 408(p)), and is not an inherited IRA within the meaning of Partial rollovers and conversions: IRA distributions