Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

93

Distributions from IRAs, Roth IRAs, qualified plans, 403(a) and 403(b) arrangements, and 457(b) plans are NOT subject to the surtax, but are included in computing the “threshold” amount, so the effect will be the same in many cases as if they were subject to the tax: Chris Example: Chris and his wife have MAGI of $200,000 in 2013, including $50,000 of interest and dividends, before taking any IRA distributions. At this point they are not subject to the surtax, because their MAGI is below the $250,000 threshold. Then Chris takes $100,000 from his IRA (all pretax money). This increases their MAGI to $300,000, putting them above the threshold by $50,000. Their entire $50,000 of interest and dividends are now subject to the surtax. D. Impact on trusts that are beneficiaries of retirement plans. Trusts and estates have a much lower “threshold” than individuals. The dollar level at which the trust or estate enters the highest income tax bracket becomes the trust’s or estate’s “threshold” amount for purposes of the surtax. Under § 1(e), that level is $7,500 indexed for inflation. As of 2010, the $7,500 has increased to $11,200. With expiration of the “Bush tax cuts” (see “A”), the addition of this surtax means that trusts will pay a 43.4 percent tax on investment income beginning at about $11,500 of taxable income in 2013. 2.1.03 When does a “distribution” occur? For purposes of the income tax Code, when are funds considered “distributed” from a retirement plan or IRA? When the plan administrator cuts the check, mails the check, or deducts the amount from the participant’s account on its books? When the participant or beneficiary requests the distribution, receives the check, or negotiates the check? What if the check is payable to a retirement plan but is delivered to the participant? The date a distribution occurs matters for purposes of determining the deadline for completing a 60-day rollover ( ¶ 2.6.06 ) and when the distribution is includible in the recipient’s gross income. A. Check is received by the distributee. If a check payable to the participant is received by the participant, there definitely has been a distribution. See, e.g. , PLR 2004-42035, ruling there was a distribution because the employee had received the check from the plan, even though she had not cashed it. That’s not surprising. When an employee requests a direct rollover from a nonIRA plan to another plan or IRA (see ¶ 2.6.01 (C)), IRS rules require the distributing plan to make the distribution check payable to the transferee plan or IRA, but permit the distributing plan to send or give the check to the employee . Reg. § 1.401(a)(31)-1 , A-4. It sometimes occurs that the employee for whatever reason fails to deliver the check to the recipient plan or IRA within 60 days. The IRS has privately ruled that the 60-day deadline does not apply to direct rollovers, so the employee (or his executor, if the employee died holding the un-deposited check) can complete the rollover (even more than 60 days after the check was sent out from the transferor plan) by simply depositing the check into the recipient plan or IRA account. See PLR 2010-05057 (“The distribution check was given to Taxpayer A, but made out to Company B, FBO Taxpayer A; thus the check was not payable to Taxpayer A and Taxpayer A lacked control over the check and could not have disposed of it. ...In short, Taxpayer A never received a distribution subject to the 60-day rollover requirement ...”) and PLR 2010-35044 (because this distribution was in the form of a direct rollover, “it was not subject to the 60-day rollover requirement,” therefore no “hardship extension” was needed to enable the executor to deposit the plan’s check).