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Chapter 2: Income Tax Issues
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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
(se
e ¶ 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).