Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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 See ¶ 2.1.06 (L) regarding an exception for certain court-ordered transfers between spouses in connection with divorce.  Regarding transfer of an inherited retirement benefit generally, see ¶ 4.6.03 ; regarding transfer from a trust or estate to the beneficiary(ies) of the trust or estate, see ¶ 6.5.07 – ¶ 6.5.08 . C. UBTI. An otherwise tax-exempt retirement plan is subject to the income tax on unrelated business taxable income. ¶ 8.2 . D. Prohibited transaction with IRA. See ¶ 8.1.06 for how a prohibited transaction involving an IRA can result in a deemed distribution of the entire IRA. E. IRA acquires collectible. The acquisition by any IRA (or by a self-directed account in a QRP) of a “collectible” (as defined in § 408(m)(2) ) is treated as a distribution of the cost of the “collectible.” § 408(m)(1) . F. QRPs: Certain loan events. A loan made by a QRP to the participant may be treated as a distribution at the time the loan is made or if the loan is defaulted. See ¶ 2.1.07 . G. Roth IRA conversion. Transferring or “rolling over” assets from a traditional plan or IRA to a Roth IRA is taxed as if it were a distribution. See ¶ 5.4.03 , ¶ 5.4.04 . H. Plan-owned life insurance. Ownership of a life insurance policy on the participant in his QRP account causes part of the cost of the insurance to be currently taxable income to the participant when premiums are paid from plan earnings or contributions. See ¶ 11.2.02 . 2.1.05 Whose income is it? Community property etc. Generally any plan distribution that occurs during the participant’s life is treated as gross income of the participant , regardless of who actually receives it. In states that apply community property or similar “marital property” law, earnings of one spouse generally belong equally to both spouses. However, community property rules do not affect the income taxation of distributions from QRPs. The federal law giving the worker’s spouse certain rights to the worker’s QRP benefits (see ¶ 3.4 ) preempts state-law marital property rights such as community property. An IRA, in contrast, is not subject to the federal spousal-rights rules, and thus may be community property under applicable state law. However, even if the spouses are co-owners of the IRA under their state’s law, the Tax Court has ruled that distributions from the IRA are gross income to the participant only , under federal income tax law. Morris , 83 TCM 1104, T.C. Memo 2002-17; Bunney , 114 T.C. 259 (2000). See also PLR 2009-23027 (IRA paid to alimony trust for participant’s spouse taxable to participant despite § 682 ). A participant cannot reduce his income tax burden by, say, directing his IRA provider to distribute funds directly to his grandchildren, any more than you can avoid tax on your salary by endorsing your paycheck to your children. 2.1.06 List of no-tax and low-tax distributions