Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

 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 ( i.e., the contribution plus or minus earnings or losses thereon) (NOT the actual year-end value of the amount that was recharacterized) is treated as part of the Year- end Account Balance of the IRA that receives the recharacterization contribution (even though the amount is not received until AFTER the end of the year) Simon Example: On 11/30/09, Simon made a regular contribution of $3,000 to a Roth IRA for the year 2009. Without recharacterization, that contribution and its earnings would not affect his 12/31/09 traditional IRA account balance because that money is in a Roth IRA, not in a traditional IRA. After the end of 2009, but within the deadline for recharacterization ( ¶ 5.6.02 ), Simon recharacterizes that contribution as a contribution to a traditional IRA. That recharacterization is taken into account, meaning that the $3,000 Roth IRA contribution (plus or minus net income attributable thereto; see ¶ 5.6.02 ) IS included in the 12/31/09 Year-end Account Balance of Simon’s traditional IRA for purposes of applying the cream-in-the-coffee rule (as well as for RMD purposes; see ¶ 5.2.02 (D)). D. Total Nondeductible Contributions. This is the participant’s basis in all of his traditional IRAs as of December 31 of the year preceding the distribution year, plus the amount of any nondeductible “regular” contribution ( ¶ 5.3.02 ) made to any of his traditional IRAs for the year of the distribution (even if made after the end of the year); see Instructions for IRS Form 8606 (2009), line 2. This number will be the numerator of The Fraction. E. Outstanding Rollovers. A rollover from one traditional IRA to another that is distributed from the first IRA within 60 days before the end of the distribution year, and is received by the recipient IRA AFTER year-end, must be included in the denominator of The Fraction. The IRS calls this an outstanding rollover . Notice 87-16, Part III. This is similar to the rule for required minimum distributions, where the Year-end Account Balance is increased by rollovers that are in “mid air” on December 31 ( ¶ 1.2.05 ). F. The aggregation rule: Which IRAs must be aggregated. § 408(d)(2) provides that: “For purposes of applying section 72 to any [IRA distribution]...(A) all individual retirement plans shall be treated as 1 contract, [and] (B) all distributions during any taxable year shall be treated as 1 distribution....” Here are the IRAs which must be (or must not be) aggregated with each other for purposes of determining the A–E amounts above. “Individual retirement plans” to be aggregated include the participant’s traditional IRAs, individual retirement annuities, and SEP and SIMPLE IRAs ( ¶ 8.3.13 ). See § 7701(a)(37) ; § 408(k)(1) , (p)(1) ; Notice 87-16, Part III; and Instructions for IRS Form 8606 (2009), Line 6, p. 6. All such accounts the participant owns are considered one giant IRA; then, each distribution from