Life and Death Planning for Retirement Benefits

Introduction

Terminology Used in this Book

Abbreviations and Symbols

CHAPTER 1: THE MINIMUM DISTRIBUTION RULES

1.1 Introduction to the RMD Rules

1.1.01 Where to find the law

1.1.02 Which plans are subject to the RMD rules

1.1.03 RMD economics: The value of deferral

1.1.04 WRERA suspended RMDs for 2009

1.1.05 RMDs under defined plans, “annuitized” DC plans

1.2 RMD Fundamentals

1.2.01 The 12 Fundamental Laws of the RMD Universe

1.2.02 Which distributions count towards the RMD

1.2.03 Tables to determine Applicable Distribution Period (ADP)

1.2.04 What is a person’s “age” for RMD purposes?

1.2.05 How to determine “account balance” for RMD purposes

1.2.06 How rollovers and RMDs interact

1.2.07 Post-year-end recharacterization of Roth conversion

1.2.08 Valuation rules for determining account balance

1.3 RMDs During Participant’s Life

1.3.01 Road Map: How to compute lifetime RMDs

1.3.02 The Uniform Lifetime Table: Good news for retirees

1.3.03 Lifetime RMDs: Much-younger-spouse method

1.3.04 Taking distributions from multiple plans

1.3.05 Separate accounts within a single plan

1.4 The RBD and First Distribution Year

1.4.01 Required Beginning Date (RBD); Distribution Year

1.4.02 RBD for IRAs and Roth IRAs

1.4.03 QRPs: RBD for 5-percent owner

1.4.04 QRPs, cont.: RBD for non-5-percent owner

1.4.05 RBD for 403(b) plans (including “grandfather rule”)

1.4.06 What does “retires” mean?

1.4.07 RBD versus first Distribution Year: The limbo period

1.4.08 Grandfather rule: TEFRA 242(b) elections

1.4.09 Effect of 2009 one-year suspension of RMDs

1.5 RMDs after the Participant’s Death

1.5.01 Post-death RMD rules: Basics and overview

1.5.02 Road Map for determining post-death RMDs

1.5.03 Road Map, cont.: RMDs in case of death BEFORE the RBD

1.5.04 Road Map, cont.: RMDs in case of death AFTER the RBD

1.5.05 RMDs based on life expectancy of Designated Beneficiary

1.5.06 Death before the RBD: The 5-year (sometimes 6-year) rule

1.5.07 Life expectancy or 5-year rule: Which applies?

1.5.08 Computing RMDs based on participant’s life expectancy

1.5.09 Aggregation of inherited accounts for RMD purposes

1.5.10 Plan not required to offer stretch payout or lump sum

1.5.11 Switching between 5-year rule and life expectancy method

1.5.12 Who gets the benefits when the beneficiary dies

1.5.13 What is the ADP after the beneficiary’s death?

1.6 Special Rules for the Surviving Spouse

1.6.01 Road Map of the special spousal rules

1.6.02 Definition of “sole beneficiary”

1.6.03 Road Map: How to determine RMDs of surviving spouse

1.6.04 Required Commencement Date: Distributions to spouse

1.6.05 Special “(B)(iv)(II) rule” if both spouses die young

1.6.06 When is a trust for the spouse the same as the spouse?

1.7 The Beneficiary and the “Designated Beneficiary”

1.7.01 Significance of having a Designated Beneficiary

1.7.02 Who is the participant’s beneficiary?

1.7.03 Definition of Designated Beneficiary

1.7.04 Estate cannot be a Designated Beneficiary

1.7.05 Multiple beneficiary rules and how to escape them

1.7.06 Multiple beneficiaries: Who must take the RMD?

1.7.07 Simultaneous and close-in-time deaths

1.8 Modifying RMD Results after the Participant’s Death

1.8.01 The separate accounts rule

1.8.02 How do you “establish” separate accounts?

1.8.03 “Removing” beneficiaries by Beneficiary Finalization Date

1.9 Enforcement of the RMD Rules

1.9.01 Who enforces the minimum distribution rules

1.9.02 Failure to take an RMD: 50% penalty and other effects

1.9.03 IRS waiver of the 50 percent penalty

1.9.04 Statute of limitations on the 50 percent penalty

CHAPTER 2: INCOME TAX ISSUES

2.1 Income Tax Treatment: General & Miscellaneous

2.1.01 Plan distributions taxable as ordinary income

2.1.02 Post-2010 tax increases; surtax on investment income

2.1.03 When does a “distribution” occur?

2.1.04 Actual distributions and deemed distributions

2.1.05 Whose income is it? Community property etc.

2.1.06 List of no-tax and low-tax distributions

2.1.07 Income tax, RMD, and estate planning aspects of plan loans

2.1.08 Excess IRA contributions; corrective distributions

2.2 If the Participant Has After-tax Money in the Plan or IRA

102

2.2.01 Road Map: Tax-free distribution of participant’s “basis”

102

2.2.02 General rule: The “cream-in-the-coffee rule” of § 72

103

2.2.03 Participant’s basis in a QRP or 403(b) plan

103

2.2.04 QRP distributions from account that contains after-tax money

104

2.2.05 Partial and split rollovers, conversions: QRP distributions

107

A. Introduction: Please read this first

107

B. Part direct rollover to Roth IRA, part direct rollover to traditional IRA

108

C. Part outright distribution, part direct rollover into any IRA(s)

109

D. Distribution outright to participant followed by one or more 60-day rollover(s)

110

E. Direct rollover into multiple traditional (or Roth) IRAs

111

F. How these options apply to QRP beneficiaries

112

G. Effective date and retroactivity of Notice 2014-54

112

2.2.06 Participant’s basis in a traditional IRA

115

2.2.07 Beneficiary’s basis in an inherited IRA

115

2.2.08 How much of a traditional IRA distribution is basis?

116

2.2.09 Partial rollovers and conversions: IRA distributions

120

2.2.10 Exceptions to the cream-in-the-coffee rule for IRAs

120

2.3 Income Tax Withholding

121

2.3.01 Withholding of federal income taxes: overview

121

2.3.02 Periodic, nonperiodic, and eligible rollover payments

121

2.3.03 Exceptions and special rules

123

2.3.04 Mutually voluntary withholding

124

2.3.05 How withheld income taxes are applied

124

2.4 Lump Sum Distributions

124

2.4.01 Introduction to lump sum distributions

124

2.4.02 First hurdle: Type of plan

125

2.4.03 Second hurdle: “Reason” for distribution

125

2.4.04 Third hurdle: Distribution all in one taxable year

126

2.4.05 Exceptions to the all-in-one-year rule

128

2.4.06 Special averaging: Participant born before 1936

129

2.5 Net Unrealized Appreciation of Employer Stock

129

2.5.01 NUA: Tax deferral and long-term capital gain

129

2.5.02 Reporting NUA distributions

130

2.5.03 Distributions after the employee’s death

130

2.5.04 Basis of stock distributed in life, held until death

131

2.5.05 Election to include NUA in income

132

2.5.06 Should employee keep the LSD or roll it over?

132

2.5.07 NUA and partial rollovers

133

2.6 Rollovers and Plan-to-Plan Transfers

134

2.6.01 Definitions: rollovers, trustee-to-trustee transfers, etc.

135

2.6.02 Distributions that can (or can’t) be rolled over

137

2.6.03 Rollover in a year in which a distribution is required

138

2.6.04 60-day rollover: Must roll over same property received

140

2.6.05 60-day rollovers: Only one IRA-to-IRA rollover in 12 months

140

2.6.06 60-day rollover deadline; exceptions and blanket waivers

142

2.6.07 Hardship waiver of 60-day rollover deadline

143

2.6.08 Avoid some rollover requirements with IRA-to-IRA transfer

146

2.7 Retiree Road Map

147

2.7.01 Plan-related issues to discuss with your client

147

2.7.02 Reasons to roll money from one plan or IRA to another

148

2.7.03 Best how-to rollover tips

149

2.7.04 How many IRAs should a person own?

149

2.7.05 How to take RMDs and other distributions

150

CHAPTER 3: MARITAL MATTERS

151

3.1 Considerations for Married Participants

151

3.1.01 Road Map: Advising the Married Participant

151

3.1.02 Road Map: Advising the Surviving Spouse

152

3.1.03 Simultaneous death clauses

153

3.2 Spousal Rollover; Election to Treat Decedent’s IRA as Spouse’s IRA

154

3.2.01 Advantages and drawbacks of spousal rollover

154

3.2.02 Spousal rollover: QRPs and 403(b) plans

155

3.2.03 Rollover (or spousal election) for IRA or Roth IRA

156

3.2.04 Roth conversion by surviving spouse

158

3.2.05 Rollover or election by spouse’s executor

159

3.2.06 Deadline for completing spousal rollover

159

3.2.07 Plans the spouse can roll benefits into

160

3.2.08 Rollover if spouse is under age 59½

161

3.2.09 Spousal rollover through an estate or trust

162

3.3 Qualifying for the Marital Deduction

164

3.3.01 Road Map: Leaving Benefits to Spouse or Marital Trust

164

3.3.02 Leaving retirement benefits to a QTIP trust

165

3.3.03 IRS regards benefits, trust, as separate items of QTIP

166

3.3.04 Entitled to all income: State law vs. IRS

167

3.3.05 Ways to meet the “entitled” requirement; Income vs. RMD

168

3.3.06 Distribute all income to spouse annually

169

3.3.07 Do not require stub income to be paid to spouse’s estate!

170

3.3.08 Combination marital deduction-conduit trust

171

3.3.09 General Power marital trust

171

3.3.10 Automatic QTIP election for “survivor annuities”

171

3.3.11 Marital deduction for benefits left outright to spouse

172

3.4 REA ’84 and Spousal Consent

172

3.4.01 Introduction to the Retirement Equity Act of 1984

172

3.4.02 Plans subject to full-scale REA requirements

173

3.4.03 REA requirements for “exempt” profit-sharing plans

173

3.4.04 IRAs, Roth IRAs, and 403(b) plans

174

3.4.05 Various REA exceptions and miscellaneous points

174

3.4.06 Requirements for spousal consent or waiver

175

3.4.07 Spousal waiver or consent: Transfer tax aspects

176

CHAPTER 4: INHERITED BENEFITS: ADVISING EXECUTORS AND BENEFICIARIES

178

4.1 Executor’s Responsibilities

178

4.1.01 The Executor’s Road Map

178

4.1.02 Recharacterizing the decedent’s Roth conversion

178

4.1.03 Who can make or withdraw decedent’s IRA contribution?

180

4.1.04 Completing rollover of distribution made to the decedent

181

4.1.05 Executor’s responsibilities regarding decedent’s RMDs

183

4.2 Post-Death Transfers, Rollovers, & Roth Conversions

185

4.2.01 How to title an inherited IRA

185

4.2.02 Post-death distributions, IRA-to-IRA transfers

186

4.2.03 Combining inherited IRAs

189

4.2.04 Nonspouse beneficiary rollovers from nonIRA plans

189

4.2.05 Nonspouse beneficiary Roth conversions

192

4.3 Federal Estate Tax Issues

194

4.3.01 Retirement benefits on the estate tax return

194

4.3.02 Problems paying the estate tax

194

4.3.03 Alternate valuation method (AVM) for retirement benefits

195

4.3.04 AVM, cont.: Distributions, other IRA events as “disposition”

195

4.3.05 AVM, cont.: Sale of assets inside the IRA

198

4.3.06 Federal estate tax exclusion for retirement benefits

198

4.3.07 Valuation discount for unpaid income taxes

198

4.3.08 Deaths in 2010: One-year “repeal” of the federal estate tax

199

4.4 Qualified Disclaimers of Retirement Benefits

200

4.4.01 Post-mortem disclaimer checklist

200

4.4.02 Requirements for qualified disclaimer: § 2518

201

4.4.03 Income tax treatment of disclaimers

201

4.4.04 What constitutes “acceptance” of a retirement benefit

202

4.4.05 Effect of taking a distribution; partial disclaimers

204

4.4.06 Deadline for qualified disclaimer

205

4.4.07 To whom is the disclaimer delivered?

206

4.4.08 Who gets the disclaimed benefits and how do they get them?

206

4.4.09 Disclaimers, ERISA, and the plan administrator

208

4.4.10 Disclaimers and the minimum distribution rules

210

4.4.11 How a disclaimer can help after the participant’s death

210

4.4.12 Double deaths: Disclaimer by beneficiary’s estate

211

4.4.13 Building disclaimers into the estate plan: Checklist

212

4.5 Other Cleanup Strategies

214

4.5.01 Check the plan’s default beneficiary

215

4.5.02 Invalidate the beneficiary designation

215

4.5.03 Spousal election to take share of estate

215

4.5.04 Will (or beneficiary designation form) contest

216

4.5.05 Reformation of beneficiary designation form

216

4.5.06 Reformation of trust or will

217

4.5.07 Choose the right cleanup strategy

218

4.6 Income in Respect of a Decedent (IRD)

219

4.6.01 Definition of IRD; why it is taxable

220

4.6.02 When IRD is taxed (normally when received)

220

4.6.03 Tax on transfer of the right-to-receive IRD

220

4.6.04 Income tax deduction for estate tax paid on IRD

221

4.6.05 Who gets the § 691(c) (IRD) deduction

222

4.6.06 IRD deduction for deferred payouts

223

4.6.07 IRD deduction: Multiple beneficiaries or plans

224

4.6.08 IRD deduction on the income tax return

224

4.7 Road Map: Advising the Beneficiary

224

CHAPTER 5: ROTH RETIREMENT PLANS

226

5.1 Roth Plans: Introduction

226

5.1.01 Introduction to Roth retirement plans

226

5.1.02 Roth retirement plan abuses

226

5.2 Roth IRAs: Minimum Distribution and Income Tax Aspects

227

5.2.01 Roth (and deemed Roth) IRAs vs. traditional IRAs

227

5.2.02 Roth IRAs and the minimum distribution rules

228

5.2.03 Tax treatment of Roth IRA distributions: Overview

229

5.2.04 Qualified distributions: Definition

230

5.2.05 Computing Five-Year Period for qualified distributions

231

5.2.06 Tax treatment of nonqualified distributions

233

5.2.07 The Ordering Rules

234

5.3 How to Fund a Roth IRA; Regular and Excess Contributions

235

5.3.01 The eight ways to fund a Roth IRA

235

5.3.02 “Regular” contributions from compensation income

235

5.3.03 Applicable Dollar Limit for regular contributions

236

5.3.04 Who may make a “regular” Roth IRA contribution

237

5.3.05 Penalty for excess Roth IRA contributions

239

5.4 Conversion of Traditional Plan or IRA to a Roth IRA

239

5.4.01 What type of plan may be converted to a Roth IRA

239

5.4.02 Who may convert: age, plan participation, income, etc.

241

5.4.03 Tax treatment of converting traditional IRA to Roth IRA

242

5.4.04 Tax treatment of converting nonIRA plan to Roth IRA

243

5.4.05 Income spreading for conversions in 1998 or 2010

244

5.4.06 Failed conversions

245

5.4.07 Mechanics of traditional IRA-to-Roth IRA conversions

246

5.4.08 Mechanics of conversion from other traditional plans

246

5.5 Roth Plans and the 10% Penalty For Pre-Age 59½ Distributions

247

5.5.01 Penalty applies to certain Roth plan distributions

247

5.5.02 Roth conversion prior to reaching age 59½

248

5.5.03 Conversion while receiving “series of equal payments”

249

5.6 Recharacterizing an IRA or Roth IRA Contribution

250

5.6.01 Which IRA contributions may be recharacterized

250

5.6.02 Income attributable to the contribution

251

5.6.03 How to recharacterize certain IRA/Roth IRA contributions

252

5.6.04 Partial recharacterizations

253

5.6.05 Deadline for Roth IRA contributions and conversions

254

5.6.06 Recharacterization deadline: Due date “including extensions”

255

5.6.07 Same-year and immediate reconversions banned

257

5.7 Designated Roth Accounts

257

5.7.01 Meet the DRAC: Roth 401(k)s, 403(b)s, 457(b)s

257

5.7.02 DRAC contributions: Who, how much, how, etc.

258

5.7.03 RMDs and other contrasts with Roth IRAs

260

5.7.04 DRACs: Definition of “qualified distribution”

260

5.7.05 Nonqualified DRAC distributions

262

5.7.06 Rollovers of DRAC distributions: General rules

263

5.7.07 DRAC-to-DRAC rollovers

264

5.7.08 DRAC-to-Roth-IRA rollovers: In general

265

5.7.09 DRAC-to-Roth IRA rollovers: Effect on Five-Year Period

266

5.7.10 DRAC accounting may not shift value

267

5.7.11 In-plan conversions

268

5.8 Putting it All Together: Roth Planning Ideas and Principles

268

5.8.01 Roth plan or traditional? It’s all about the price tag

269

5.8.02 Factors that incline towards doing a Roth conversion

271

5.8.03 Factors that incline against a Roth conversion

272

5.8.04 How participant’s conversion helps beneficiaries

273

5.8.05 Annual contributions: Traditional vs. Roth plan

274

5.8.06 Roth plans and the estate plan

275

CHAPTER 6: LEAVING RETIREMENT BENEFITS IN TRUST

278

6.1 Trust as Beneficiary: Preliminaries

278

6.1.01 Trust as beneficiary: Drafting checklist

278

6.1.02 Trust accounting for retirement benefits

279

6.1.03 Trust accounting: Drafting solutions

281

6.1.04 “Total return” or “unitrust” method

282

6.1.05 Transferring a retirement plan out of a trust or estate

283

6.1.06 Can a participant transfer an IRA to a living trust?

286

6.1.07 Individual retirement trusts (trusteed IRAs)

286

6.2 The Minimum Distribution Trust Rules

288

6.2.01 When and why see-through trust status matters

288

6.2.02 RMD trust rules: Ground rules

289

6.2.03 What a “see-through trust” is; the five “trust rules”

290

6.2.04 Dates for testing trust’s compliance with rules

291

6.2.05 Rule 1: Trust must be valid under state law

291

6.2.06 Rule 2: Trust must be irrevocable

291

6.2.07 Rule 3: Beneficiaries must be identifiable

292

6.2.08 Rule 4: Documentation requirement

293

6.2.09 Rule 5: All beneficiaries must be individuals

295

6.2.10 Payments to estate for expenses, taxes

295

6.2.11 Effect of § 645 election on see-through status

296

6.3 RMD Rules: Which Trust Beneficiaries Count?

297

6.3.01 If benefits are allocated to a particular share of the trust

297

6.3.02 Separate accounts: benefits payable to a trust or estate

299

6.3.03 Beneficiaries “removed” by Beneficiary Finalization Date

301

6.3.04 Disregarding “mere potential successors”

303

6.3.05 Conduit trust for one beneficiary

303

6.3.06 Conduit trust for multiple beneficiaries

306

6.3.07 Accumulation trusts: Introduction

307

6.3.08 Accumulation trust: O/R-2-NLP

308

6.3.09 Accumulation trust: “Circle” trust

309

6.3.10 Accumulation trust: 100 percent grantor trust

310

6.3.11 Powers of appointment

311

6.3.12 Combining two types of qualifying trusts

312

6.4 Estate Planning with the RMD Trust Rules

313

6.4.01 Boilerplate provisions for trusts named as beneficiary

313

6.4.02 Advance rulings on see-through trust status

314

6.4.03 Should you use a separate trust for retirement benefits?

315

6.4.04 Planning choices: Trust for disabled beneficiary

315

6.4.05 Planning choices: Trusts for minors

317

6.4.06 Planning choices: Trust for spouse

320

6.4.07 Generation-skipping and “perpetual” trusts

322

6.4.08 “Younger heirs at law” as “wipeout” beneficiary

323

6.5 Trust Income Taxes: DNI Meets IRD

323

6.5.01 Income tax on retirement benefits paid to a trust

323

6.5.02 Trust passes out taxable income as part of “DNI”

324

6.5.03 Trust must authorize the distribution

326

6.5.04 Trusts and the IRD deduction

327

6.5.05 IRD and the separate share rule

327

6.5.06 IRD, separate shares, and discretionary funding

329

6.5.07 Income tax effect of transferring plan

330

6.5.08 Funding pecuniary bequest with right-to-receive IRD

331

6.6 See-Through Trust Tester Quiz

332

CHAPTER 7: CHARITABLE GIVING

337

7.1 Three “Whys”: Reasons to Leave Benefits to Charity

337

7.1.01 What practitioners must know

337

7.1.02 Reasons to leave retirement benefits to charity

338

7.1.03 Charitable pledges (and other debts)

340

7.2 Seven “Hows”: Ways to Leave Benefits to Charity

340

7.2.01 Name charity as sole plan beneficiary

340

7.2.02 Leave benefits to charity, others, in fractional shares

341

7.2.03 Leave pecuniary gift to charity, residue to individuals

344

7.2.04 Formula bequest in beneficiary designation

346

7.2.05 Leave benefits to charity through a trust

346

7.2.06 Leave benefits to charity through an estate

347

7.2.07 Disclaimer-activated gift

348

7.3 RMDs and Charitable Gifts Under Trusts

349

7.3.01 Trust with charitable and human beneficiaries

349

7.3.02 If charitable gift occurs at the participant’s death

350

7.3.03 If charitable gift occurs later

351

7.4 Income Tax Treatment of Charitable Gifts from a Trust or Estate

354

7.4.01 Introduction to trust income tax rules, “DNI,” and the NIIT

354

7.4.02 DNI deduction, retirement benefits, and charity

356

7.4.03 Charitable deduction under § 642(c)

356

7.4.04 Timing of charitable deduction for trust or estate

363

7.4.05 Transfer benefits to charity to avoid “separate share” and other rules

364

7.4.06 How to name a charity as beneficiary through a trust

367

7.5 Seven “Whiches”: Types of Charitable Entities

368

7.5.01 Suitable: Public charity

368

7.5.02 Suitable: Private foundation

368

7.5.03 Suitable: Donor-advised fund

369

7.5.04 Suitable: Charitable remainder trust

369

7.5.05 Income tax rules for CRTs; IRD deduction

370

7.5.06 Solving planning problems with a CRT

373

7.5.07 Reasons NOT to leave benefits to a CRT

376

7.5.08 Suitable: Charitable gift annuity

377

7.5.09 Usually unsuitable: Charitable lead trust

378

7.5.10 Unsuitable: Pooled income fund

378

7.6 Lifetime Gifts of Retirement Benefits

379

7.6.01 Lifetime gifts from distributions

379

7.6.02 Give your RMD to charity

380

7.6.03 Gifts from a pre-age 59½ “SOSEPP”

381

7.6.04 Gift of NUA stock

381

7.6.05 Gift of other low-tax lump sum distribution

382

7.6.06 Give ESOP qualified replacement property to CRT

382

7.6.07 Qualified Charitable Distributions

382

7.6.08 Planning uses and pitfalls of QCDs

384

7.7 Putting it All Together

386

CHAPTER 8: INVESTMENT ISSUES; PLAN TYPES

387

8.1 IRAs: Issues for Investors

387

8.1.01 Various investment issues for IRAs

387

8.1.02 Investment losses and IRAs

388

8.1.03 Restoring lawsuit winnings to IRA

390

8.1.04 Paying, deducting, IRA investment expenses

390

8.1.05 IRAs owning “nontraditional” investments

391

8.1.06 IRAs and prohibited transactions

394

8.2 IRAs and the Tax on UBTI

397

8.2.01 UBTI: Rationale, exemptions, returns, double tax, etc.

397

8.2.02 Income from an IRA-operated trade or business

397

8.2.03 When investment income becomes UBTI

398

8.2.04 Income from debt-financed property

398

8.3 Types of Retirement Plans

399

8.3.01 Overview of types of plans

399

8.3.02 401(k) plan; elective deferral; CODA

400

8.3.03 403(b) plan

400

Deemed IRA, deemed Roth IRA. See 5.2.01.

400

8.3.04 Defined Benefit plan

400

8.3.05 Defined Contribution plan

402

Designated Roth account (DRAC). See 5.7.

403

8.3.06 ESOP (Employee Stock Ownership Plan)

403

8.3.07 Individual Account Plan. Defined Contribution Plan. 8.3.05.

403

8.3.08 Individual Retirement Account (IRA); stretch IRA

403

8.3.09 Keogh plan

403

Money purchase plan. See 8.3.10.

404

8.3.10 Pension plan

404

8.3.11 Profit-sharing plan

405

8.3.12 Qualified Retirement Plan

405

Roth IRA. See 5.2.01.

406

8.3.13 SEP-IRA, SIMPLE

406

Traditional IRA. See 8.3.08.

406

Trusteed IRA. See 8.3.08, 6.1.07.

406

CHAPTER 9: DISTRIBUTIONS BEFORE AGE 59 ½

407

9.1 10% Penalty on Early Distributions

407

9.1.01 What practitioners must know

407

9.1.02 The § 72(t) penalty on early distributions

407

9.1.03 How the penalty applies to particular distributions

407

9.1.04 Enforcement of early distributions penalty

408

9.2 Exception: “Series of Equal Payments”

409

9.2.01 Series of substantially equal periodic payments (SOSEPP)

409

9.2.02 How this exception works

409

9.2.03 Notice 89-25 (A-12) and its successor, Rev. Rul. 2002-62

410

9.2.04 Steps required to initiate a SOSEPP

410

9.2.05 The three methods: RMD, amortization, annuitization

410

9.2.06 Variations on the three methods

411

9.2.07 Choose single or joint life expectancy

411

9.2.08 Notes on Joint and Survivor Life Table

412

9.2.09 Notes on Single, Uniform Lifetime Tables

412

9.2.10 What interest rate assumption is used

412

9.2.11 What account balance is used

413

9.2.12 Applying the SOSEPP exception to multiple IRAs

413

9.2.13 Starting a second series to run concurrently

414

9.2.14 Procedural and reporting requirements

414

9.3 Modifying the SOSEPP

414

9.3.01 Effects of a forbidden modification of series

414

9.3.02 When the no-modification period begins and ends

414

9.3.03 Exceptions for death or disability

415

9.3.04 Changing to RMD method after the SOSEPP commences

415

9.3.05 When taking an extra payment is not a modification

415

9.3.06 What other changes do NOT constitute a modification?

415

9.3.07 What changes DO constitute a modification?

416

9.3.08 Effect of divorce on the SOSEPP

417

9.3.09 Transfers to, from, or among IRAs supporting a SOSEPP

417

9.4 Other Exceptions to the Penalty

418

9.4.01 Death benefits

419

9.4.02 Distributions attributable to total disability

419

9.4.03 Distributions for deductible medical expenses

419

9.4.04 QRPs, 403(b) plans: Early retirement

420

9.4.05 QRPs, 403(b) plans: QDRO distributions

420

9.4.06 ESOPs only: Dividends on employer stock

420

9.4.07 IRAs only: Unemployed’s health insurance

420

9.4.08 IRAs only: Expenses of higher education

420

9.4.09 IRAs only: First-time home purchase

421

9.4.10 IRS levy on the account

422

9.4.11 Return of certain contributions

422

9.4.12 Qualified reservist distributions

422

9.4.13 Exceptions for tax-favored disasters

422

CHAPTER 10: RMD RULES FOR "ANNUITIZED" PLANS

423

10.1 Terminology You Must Know

423

10.1.01 Annuity, deferred and immediate

423

10.1.02 Meaning of “annuitize”

424

10.1.03 Variable vs. fixed annuities

424

10.1.04 What a “Defined Benefit plan” is

425

10.1.05 What a “Defined Contribution plan” is

426

10.2 RMDs for Defined Benefit Plans

427

10.2.01 Introduction to the DB/annuity RMD rules

427

10.2.02 Differences between DB, DC plan rules

428

10.2.03 Payment intervals; other DB terminology

428

10.2.04 Permitted forms, durations, of annuity

428

10.2.05 Payments must be nonincreasing, except…

430

10.2.06 Other changes permitted after the ASD

432

10.2.07 When the annuity payments must commence; the RBD

433

10.2.08 Converting an annuity payout to a lump sum

434

10.2.09 If participant’s ASD is prior to the RBD

435

10.2.10 RMD rules for DB plan death benefits

436

10.3 Buying an Annuity Inside an IRA or Other DC Plan

438

10.3.01 Purchasing an immediate annuity inside an IRA

438

10.3.02 Exception for “Qualified Longevity Annuities”

439

10.3.03 Definition of a QLAC

439

10.3.04 Dollar and percentage limits on QLAC purchases

440

10.3.05 QLAC concept does not apply to Roth IRAs

440

10.3.06 Death benefits under a QLAC

441

10.3.07 Planning use for QLACs

441

10.4 Annuity Payouts from Plans: Putting It All Together

442

10.4.01 Drawback of nonspouse survivor annuities

442

10.4.02 Illustrations: Different choices

442

10.4.03 Expert tip: Subsidized plan benefits

443

10.4.04 More expert tips: How to evaluate choices

444

10.4.05 Problems with the annuity rules

444

CHAPTER 11: INSURANCE, ANNUITIES, AND RETIREMENT PLANS

446

11.1 Miscellaneous Retirement/Insurance Rules

446

11.1.01 The three valuation rules for annuity contracts

446

11.1.02 RMD extension for insolvent insurance company

448

11.2 Plan-Owned Life Insurance: Income Taxes

448

11.2.01 Tax consequences to participant: During employment

448

11.2.02 Current Insurance Cost: From P.S. 58 to Table 2001

450

11.2.03 Current Insurance Cost: Using insurer’s actual rates

450

11.2.04 Current Insurance Cost: Term life insurance

451

11.2.05 Current Insurance Cost: Investment in the contract

451

11.2.06 Income tax consequences to beneficiaries

452

11.3 Plan-Owned Life Insurance: The “Rollout” at Retirement

452

11.3.01 Options for the policy when the participant retires

452

11.3.02 How to determine policy’s FMV: Rev. Proc. 2005-25

453

11.3.03 Tax code effects of sale below market value

454

11.3.04 Plan sells the policy to the participant

455

11.3.05 Sale to participant: Prohibited transaction issue

455

11.3.06 Plan sells policy to the beneficiary(ies)

456

11.3.07 Sale to beneficiary: Prohibited transaction aspects

457

11.4 Plan-Owned Life Insurance: Other Aspects

457

11.4.01 Estate tax avoidance: The life insurance subtrust

457

11.4.02 Avoiding estate tax inclusion and “transfer for value”

459

11.4.03 Second-to-die insurance

459

11.4.04 Reasons to buy life insurance inside the plan

460

11.4.05 Life insurance and IRAs and 403(b)s

461

11.4.06 Planning principles with plan-owned life insurance

462

11.4.07 Plan-owned insurance and the tax on UBTI

463

11.4.08 Plan-owned life insurance subject to spousal ERISA rights

463

11.5 Planning Ideas with Life Insurance and Retirement Benefits

463

11.5.01 The CHIRA™

464

11.5.02 Life insurance for under-age-59½ surviving spouse

466

11.5.03 Life insurance to protect the “stretch”

466

11.5.04 For young parents: Dump the stretch, buy life insurance

467

11.5.05 Can a beneficiary roll over life insurance proceeds?

467

11.5.06 The “dream” charitable rollover

469

11.6 Bibliography for Chapter 11

469

Appendix A: Tables

471

Appendix B: Forms

474

Appendix C: Resources

497

The Pension Answer Book

497

Ataxplan Website

497

Software

497

Newsletters

498

Quick Reference Guides

498

Choate Special Reports

499

Bibliography

500