Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

3. Is “attributable to” the participant’s being totally disabled (as defined in § 72(m)(7); see ¶ 9.4.02 ); or 4. Is a “qualified special purpose distribution,” i.e., a distribution of up to $10,000 for certain purchases of a “first home.” § 408A(d)(2)(A)(iv) , (5) ; § 72(t)(2)(F) , (8) ; see ¶ 9.4.09 . These conditions for a qualified distribution from a Roth IRA resemble the requirements for avoiding the 10 percent “early distributions” penalty of § 72(t) (¶ 5.5) , but are not identical. For example, withdrawals from a Roth IRA to pay higher education expenses are not qualified distributions, even though such withdrawals from an IRA are exempt from the 10 percent penalty ( ¶ 9.4.08 ). Note that certain distributions probably or definitely can NOT be qualified distributions, even if the Five-Year Period and triggering event requirements are met:  Corrective distributions. If various requirements are met, an IRA (or Roth IRA) contribution that is returned (together with any earnings thereon) to the contributor by a certain deadline is deemed never to have been contributed; see ¶ 2.1.08 regarding such “corrective distributions.” The “earnings” distributed along with a returned IRA contribution cannot be a qualified distribution, and therefore will be taxable (and will be subject to the 10% penalty if the individual is under age 59½ and no exception applies). Reg. § 1.408A-6 , A-1(d). The IRS might apply this principle to the earnings on any excess Roth IRA contribution, regardless of whether the excess contribution was returned to the contributor as part of a corrective distribution, although the IRS has made no pronouncement on this subject to date; see ¶ 5.1.02 .  Prohibited transactions. Engaging in a prohibited transaction with a Roth IRA causes the account to lose its exempt status, and to be deemed to be entirely distributed as of the first day of the year in which the prohibited transaction occurs. § 408(e) ; § 408A(a) ; Reg. § 1.408A-1 , A-1(b). Since the deemed distribution is coming from an account that no longer qualifies as a Roth IRA, it is presumably not a qualified distribution, though the regulations do not explicitly say that. Compare Reg. § 1.402A-1 , A-11 ( ¶ 5.7.04 (C)) which does explicitly say that the income resulting from engaging in a prohibited transaction with a DRAC cannot be a qualified distribution. Satisfying a five-year waiting period (called in this book “the Five-Year Period”) is one of two tests a Roth IRA owner must pass in order to have tax-free “qualified distributions” ( ¶ 5.2.04 ) from his Roth IRA. A. Five-Year Period for participant. The Five-Year Period (called in the statute the “ nonexclusion period ”) for all of a participant’s Roth IRAs begins on January 1 of the first year for which a contribution was made to any Roth IRA maintained for that participant. § 408A(d)(2)(B) ; Reg. § 1.408A-6 , A-2. Fred Example: On May 3, 1999, Fred put $1,000 into his Roth IRA. Fred’s Five-Year Period starts January 1, 1999, and is completed on December 31, 2003. The first year in which he can possibly have a qualified distribution is 2004. If he makes further contributions (either regular or rollover) to the same (or any other) Roth IRA, those contributions do NOT start a new Five-Year Period running. In 2006, Fred converts his $100,000 traditional IRA to a Roth IRA. This new Roth Computing Five-Year Period for qualified distributions