copyright © 2002-2007 Wall Street Instructors, Inc. All rights reserved.
Module 1
TRADITIONAL IRAs
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IRA DISTRIBUTIONS
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IRA DISTRIBUTIONS
The intent of Congress in creating IRAs was to provide retirement income. Presumably, distributions will be taken by the IRA holder upon retirement. To discourage “premature withdrawals”, the tax code imposes a 10% penalty tax on most withdrawals taken before the IRA holder reaches age 59½. By the same token, the funds invested in IRAs are to be used for retirement. The law mandates minimum distributions to be paid to a traditional IRA holder beginning no later than age 70½ (or retirement if later). Failure to take the minimum distribution is subject to a 50% penalty tax. These penalty taxes are in addition to the “regular” income tax due in the year of distribution.
Deductible & Nondeductible IRAs
Distributions from IRAs established with tax deductible contributions are fully taxable to the recipient as ordinary income. Contributions to deductible IRAs are made with before-tax dollars. The earnings in the account have grown tax-deferred. Since taxes have not been paid on either contributions or earnings in the account, the entire amount is subject to tax when withdrawn.
On the other hand, contributions to non-deductible IRAs are made with after-tax dollars, which grow tax-deferred. When withdrawn, a portion of the distribution reflects return of contributions (which have already been taxed) and a portion represents taxable earnings. Only the earnings portion is taxable as ordinary income when distributed. The following formula is used to find the non-taxable portion of distributions from non-deductible IRAs:
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Non-taxable distributions for the year =
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Total nondeductible contributions x Total distributions for the year
Year-end total IRA account balances
(plus distributions for the year)
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Example:
Barb opens her first IRA in 2005 making a $3,000 deductible contribution. In 2006, she makes a $2,000 IRA contribution to another IRA account, none of which is deductible. Also in 2006, Barb's employer contributed $7,700 to a SEP-IRA. In 2007, Barb makes no IRA contributions and withdraws $1,000 from the IRA she opened in 2005. On December 31, 2007, the current value of all of her IRAs is $15,000. To find the nontaxable portion of the $1,000 distribution taken in 2007:
Total nondeductible
contributions $2,000
________________________________ x $1,000 = $125
Total account balance $16,000
as of Dec. 31, 2007
($15,000 account balance + $1,000 distribution in 2007)
Thus, $125 of the $1,000 distribution in 2007 will not be included in Barb's taxable income. The remaining $875 is taxable.
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Please note: when applying this rule, the IRS treats all IRAs held by an individual as being one contract. Likewise, all distributions during the same taxable year are treated as one distribution. The IRS makes no distinction regarding which particular account received a contribution, or which account distributed funds. The law looks to the aggregate amounts in all IRAs, not individual account balances. Because of this, an individual who has ever contributed to a non-deductible IRA must make a similar calculation for any year in which any distribution is taken from any account.
Periodic payments
Some IRA owners elect to receive distributions from their accounts over a number of years (sometimes called installment or periodic distributions). A common method is by an annuity over the life of the employee or possibly over the lives of the employee and a designated beneficiary. Regardless of whether the payout is over the life of one person, the lives of two people, or a fixed number of years, the amount of the tax due is determined under the annuity rules. Under these rules, a portion of each payment -- corresponding to after-tax contributions -- is received tax free. The remainder is taxed as ordinary income.
Example:
Della Street, an employee of Mason & Associates Co., has contributed to her IRA for a number of years. She retires in 2007 and elects to recieve her IRA benefits in the form of an annuity. At the time of her retirement her account balance is $174,000, of which $45,000 is due to her after-tax contributions. The remaining $129,000 represents deductible contributions and earnings (including earnings on the after-tax contributions). She purchases an annuity from an insurance company that pays $25,000 per year for ten years. The taxable portion of each annual payment is determined as follows:
Investment in the contract
(after-tax contributions only)..........
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$45,000
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Expected return
($25,000 x 10 years)........................
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$250,000
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Exclusion ratio
($45,000 / $250,000).........................
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18%
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Annual exclusion
(18% x $25,000)................................
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$4,500
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Taxable portion of annual payment ($25,000 -$4,500)..............................
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$20,500
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In the case of lifetime annuities, the expected return is determined by using IRS life expectancy tables. For annuities starting after 1986, if an employee's after-tax contributions have been recovered, the entire annuity payment is taxable. This generally occurs if the annuitant outlives the life expectancy. However, if the annuitant dies before recovering all after-tax contributions, the annuitant's estate may claim a deduction on the annuitant's final income tax return for the unrecovered contribution.
Obviously, if the entire IRA balance is the result of before-tax (deductible) contributions, each periodic payment is fully taxed (as there is no "cost basis" in the account).
As with lump-sum payouts, a beneficiary of a participant who receives an annuity because of the participant's death is entitled to a $5,000 death benefit exclusion. The exclusion is taken by increasing the employee's investment in the contract.
Premature distributions
To discourage IRA holders from liquidating their nesteggs prior to retirement, the IRS imposes a 10% penalty tax on most “premature” distributions, that is, those taken before the IRA owner reaches age 59½. Exceptions to this penalty are made for distributions:
to a beneficiary upon the IRA holder’s death,
taken due to the holder’s disability,
that are part of a series of substantially equal periodic payments (at least annually) made for the life of the IRA holder or the joint lives of the holder and beneficiary,
made under a divorce decree (qualified domestic relations order),
qualified higher education expenses of the taxpayer, the taxpayer's spouse, or any of their children or grandchildren,
expenses incurred by qualified first-time homebuyers (subject to a total lifetime maximum of $10,000 from all of the holder’s IRAs), or
for significant medical expenses (in excess of 7.5% of adjusted gross income), or to pay health insurance premiums for the IRA holder after separation from employment.
rollovers and transfers to other IRAs or qualified plans.
This list is similar to the exceptions for withdrawals from other qualified retirement plans, however, the higher education and first-time homebuyer exceptions is unique to IRAs.
Unless the a premature distribution qualifies for one of these exceptions, the distribution is subject to a 10% penalty tax in addition to the ordinary income tax due on the distribution. Once the IRA holder reaches age 59½, withdrawals are no longer subject to the penalty tax. Distributions taken after age 59½, for any reason, are simply taxed as ordinary income.
Distributions upon death
death before distributions begin
If an IRA holder dies before the minimum required distributions must begin (i.e., before age 70½) and no beneficiary was named, the entire account must be distributed to the IRA holder’s estate no later than December 31st of the fifth year following the holder's death. This is the “5-year rule”.
If a beneficiary was named by the IRA holder, the IRA assets may be distributed in a number of ways. Beneficiaries may choose to receive a lump-sum distribution or a series of payments, based on the beneficiary’s life expectancy. All distributions (in excess of any non-deductible contributions) from the inherited IRA are taxable in the year the beneficiary receives them.
spouse as beneficiary
If the sole beneficiary is a surviving spouse, the spouse is assumed to simply “step into the shoes” of the deceased IRA holder. The periodic payments must begin no later than December 31 of the year the deceased IRA owner would have reached age 70½ (or December 31 of the year following the year of the IRA owner’s death if this is later). These distributions are based on the spouse's single life expectancy.
Spousal beneficiaries may also elect to treat the account as his or her own IRA. In this case, the spouse becomes the new IRA holder with the power to name new beneficiaries, make new contributions to the account, or roll new assets into, or from, the inherited account. If the spouse elects to treat the inherited IRA as his or her own account, minimum distributions based on the spouse’s life expectancy must begin when the spouse reaches age 70½.
A surviving spouse who converts an inherited IRA into his or her own name, may designate a new beneficiary. This could extend the distribution period, allowing substantial asset values to build up in the account. The decision to delay or accelerate the distributions from an inherited account obviously depends on the surviving spouse’s circumstances — need for current income, desire to conserve assets that can eventually pass to younger generations, or other personal considerations.
non-spousal beneficiary
If the beneficiary is not the account owner’s spouse (or the spouse is named jointly with others), periodic distributions must begin no later than December 31 of the year following the year of the IRA owner's death. These are based on the beneficiary’s single life expectancy. Or, the beneficiary can opt to take the account proceeds no later than December 31 of the 5th year following the owner’s death (the “5-year rule” discussed above).
Non-spousal beneficiaries may only receive distributions (lump-sum or periodic) from an “inherited IRA”. They may not make new contributions to the account, roll over funds into the account or rollover the inherited account assets into another IRA. Non-spousal beneficiaries may not change the contingent beneficiaries of the inherited account that were named by the original (now deceased) IRA holder.
For beneficiaries without a life expectancy, such as charities or an estate, the distribution must be completed under the “five-year rule” discussed above. If a trust is named as beneficiary, the ultimate beneficiaries of the trust are considered to be the beneficiaries of the IRA proceeds — and their life expectancies are used to calculate the required distributions. In the case of more than one named beneficiary, the beneficiary with the shortest life expectancy will be used to calculate distributions.
Example, Tom dies in 2002 at age 60½. He had named his wife, Erica age 50, as primary beneficiary of his IRA. Lucy, Tom's 30-year old daughter from a previous marriage is the IRA's contingent beneficiary.
Upon Tom's death Erica inherits the IRA. Erica may simply hold the account and begin to collect minimum distributions beginning in 2012 -- when Tom would have turned 70½. If she dies before the assets have been distributed, any remaining balance would pass to Lucy as contingent beneficiary. (If Lucy inherits the account, she must begin to take distributions no later than December 31 of the year following the inheritance.)
Alternately, Erica may elect to treat the inherited account as her own. By doing so she delays the start of the minimum distributions until she turns 70½, in 2022. She may also name her own beneficiary to inherit the account, effectively eliminating Lucy as a beneficiary of her father's assets.
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death after the start of minimum distribution
If the holder dies after the start of required minimum distributions (age 70½) , individual beneficiaries and trusts calculate continued distributions based on their life expectancies. Non-individuals beneficiaries (estates and charities) must take continued distributions from the account based on deceased holder’s life expectancy. Alternately, beneficiaries may choose to take the funds more rapidly.
IRA basis
If a beneficiary inherits an IRA from a person who had a “cost basis” in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless the beneficiary is the decedent’s spouse and chooses to treat the IRA as his or her own, the beneficiary cannot combine this basis with any basis maintained in other IRAs. A beneficiary who takes a distribution from an inherited IRA and his or her own IRA, both of which have “cost basis”, the beneficiary must determine the taxable and nontaxable portions of these distributions separately.
Estate Taxation of IRA Distributions
The total value of any IRAs, including death benefits payable as an annuity are included in a decedent's gross estate for estate tax purposes. This is true whether the survivor payments are paid into the decedent’s estate or directly to beneficiaries. In addition, any payments made to the decedent's estate are subject to income taxes paid by the estate. Beneficiaries who receive IRA distributions (lump-sum or periodic payments) must include the distributions in their taxable income.
Disability Distributions
The law defines a “disabled person” as one who is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long continued or indefinite duration.” This definition is very broad, making it difficult to qualify for distributions on the grounds of disability. To establish disability, the participant must furnish a medical report certified by a licensed physician to the IRS. Once disability has been established, the 10% penalty tax is waived — the participant can receive distributions, even before age 59½, but must report them as income.
Transfers due to Divorce
When an IRA is transferred to due to a legally binding divorce or separation agreement it is not taxed. Neither the IRA owner nor the recipient is subject to taxes, nor the 10% withdrawal penalty, upon transfer of ownership. Starting from the date of the transfer, the IRA is treated as the account of the former spouse who receives it — at which point, any withdrawals by the recipient are subject to all of the usual rules that apply to any other IRAs. The IRA account(s) may be transferred (directly from trustee-to-trustee) or rolled over into the ex-spouse’s existing IRA, or the IRA account could simply be retitled in the name of the recipient spouse.
Under the transfer method, the IRA owner-spouse directs the IRA trustee to transfer IRA assets affected by the divorce decree directly to the trustee of a new or existing IRA established in the name of the recipient spouse. In the rollover method, the owner-spouse withdraws the IRA assets he or she is required to transfer and re-deposits them in a new or existing IRA set up in the name of the recipient-spouse. The IRA owner-spouse could also give the IRA assets to the recipient-spouse, who would then be required to contribute those assets to a new or existing IRA in the recipient-spouse's name. Or, the IRA owner-spouse may withdraw the IRA assets that are not required to be transferred and roll those assets over into another IRA in the owner-spouse's name. The name on the existing IRA would then be changed to show the recipient spouse's ownership. Regardless of the method used, the rollover of the IRA assets must be completed within 60 days of the withdrawal from the owner-spouse's IRA. (See Rollover & Transfers)
Series of Periodic Payments
Distributions can be taken from an IRA, without penalty, before age 59½ if the payments are made in a series of substantially equal installments over the participant’s life expectancy (or joint life expectancy). However, the payments must be made at least annually and the participant faces severe penalties if the payment schedule is changed before he or she reaches the age of 59½.
Minimum mandatory distributions
Distributions may be taken in any amount after age 59½ without penalty — other than ordinary income taxes. In an effort to encourage the use of IRAs for retirement purposes, a 50% excise tax is imposed on insufficient IRA distributions. A traditional IRA holder must begin to take first taxable distributions no later than April 1st of the calendar year following the year in which the individual attains age 70½. Older workers may delay the first distribution until they retire, if this is later than age 70½. Subsequent distributions must be made by December 31st of each year thereafter.
The minimum distribution for each year is determined by dividing the value of all IRA accounts by the life expectancy of the holder. All calculations are based on calendar years. The account balance used to figure the minimum distribution is the closing balance as of the last day of the previous calendar year. (This date is used even for the year that the IRA owner turns 70½ or retires, where the first minimum distribution may be postponed until the following April 1st.)
Example: John Smith reaches age 70½ in 2006. He takes his first minimum distribution (for 2006) on April 1, 2007. For purposes of determining the minimum distribution for 2006, John uses the IRA value as of December 31, 2005 (the last day of the year preceding 2006).
value of IRAs 12 / 31 / 2005 $131,000 = $5,000
life expectancy at age 70 26.2 years
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When the first required distribution is deferred until some time during subsequent year, the account balance must be adjusted for the delayed distribution when calculating the subsequent year's distribution.
Example:
Assume the value of John Smith's IRAs grew to $156,800 on December 31, 2006. If John Smith delayed his first (2006) distribution until April 1, 2007, his second minimum distribution (for 2007) would be:
adjusted account balance $156,800 - $5,000 = $6,000
life expectancy at age 71 25.3 years
John must withdraw at least $6,000 no later than December 31, 2007. Subsequent distributions must be taken each calendar year. Had John taken his 2006 distribution in calendar year 2006, he would not have had to adjust the account balance for 2007. Since distributions in subsequent years cannot be delayed, there is no need to adjust calculations in the later years.
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It is important to note that in the prior examples, by delaying the first distribution to April 1, 2007, John Smith took two distributions in calendar year 2007 (the delayed first payment for 2006 and the payment for 2007). This may force John into a higher tax bracket in 2007, affect the tax status of Social Security benefits, or availability of means tested government programs. Even if an IRA holder is permitted to delay the first distribution, it might be best to take the first distribution in calendar year rather than delaying it until the following April 1st.
Life Expenctancies
Life expectancies are found using the IRS’s Uniform Minimum Distribution tables — using the attained age of the participant. Another IRS table is used only when the account holder has named his or her spouse as sole beneficiary, and the spouse is more than 10 years younger than the account holder. In all other situations, the "single life" table must be used. (This rule significantly simplifies the rules in effect prior to 2002.)
As time passes, an IRA holder’s life expectancy shortens — so each year the holder simply applies the life expectancy found in the table using his or her current age. Note the decreasing life expectancies in the earlier examples. (This is also a simplification of the rules in effect in 2002.)
DISTRIBUTION PERIOD
(single life)
AGE
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Life Expectancy
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70
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26.2
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71
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25.3
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72
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24.4
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73
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23.5
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74
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22.7
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75
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21.8
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LIFE EXPECTANCY TABLE FOR JOINT LIVES
If participant and beneficiary are:
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55
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56
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57
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58
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59
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60
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70
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29.9
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29.1
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28.4
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27.6
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26.9
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26.2
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71
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29.7
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29.0
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28.2
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27.5
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26.7
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26.0
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72
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29.6
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28.8
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28.1
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27.3
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26.5
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25.8
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73
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29.5
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28.7
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27.9
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27.1
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26.4
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25.6
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74
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29.4
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28.6
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27.8
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27.0
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26.2
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25.5
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75
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29.3
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28.5
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27.7
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26.9
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26.1
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25.3
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In the case of an IRA holder with multiple IRA accounts, the holder must calculate the minimum distribution for each account. The IRS allows the holder to add the minimum distributions for each account together and withdraw the aggregate required amount from any one or combination of IRAs. This affords the holder an opportunity to possibly affect his or her asset allocation within the overall retirement plan, depending on the investments within the different accounts. Also, if there is a difference between the life expectancies of the various IRAs (e.g., one IRA may have a younger spouse named as beneficiary, while another IRA names someone else as beneficiary) the accountholder can slow the amount of future distributions by taking withdrawals from IRAs with shorter life expectancies.
Keep in mind this process calculates the minimum mandatory distribution. The holder can take more from the account without penalty (other than ordinary taxes on distributions).
Withholding tax on distributions
In general, the IRS requires IRA custodians to withhold federal income tax on IRA distributions. For annuities or other periodic distributions from an IRA, recipients may elect to not have taxes withheld. Lump-sum distributions are always subject to a 20% withholding rate — recipients of lump sum distributions may not opt out of withholding. Likewise, distributions payable outside the United States or its possessions may not elect to forego withholding. Rollovers are subject to 20% withholding, direct transfers of IRA assets between trustees are not.
IRA Rollovers & Transfers
IRA rollovers and transfers are tax-free movement of an individual's funds from one IRA to another IRA or from a qualified retirement plan to an IRA. Subject to strict rules, individuals may receive money from an IRA or plan, hold it for a short period of time, and then deposit the funds in an IRA without paying a penalty or including the amount in taxable income - this is a "rollover". Movement of funds directly from trustee to trustee are called "transfers".
IRA transfers and rollovers permit individuals to change IRA investments during the year, to consolidate several different types of IRA investments into one, to change the IRA trustee or to alter the mix of their IRA investments.
A rollover involves a moving assets from an existing qualified retirement plan or IRA to the individual and then from the individual to the new retirement plan or IRA. Since the individual actually possesses the IRA assets during a rollover, the IRS requires the "old" trustee to withhold income taxes on the "distribution". By contrast, there is no withholding in a transfer, moving assets directly from trustee-to-trustee.
Rollover rules
Two general conditions must be met to take advantage of a tax-free rollover of assets, i.e., moving assets from one IRA to an individual who then redeposits the amount to another IRA:
the amount distributed by the IRA to the individual must be transferred to the new IRA no later than 60 days after it was received, and
rollovers can occur only once a year.
A withdrawal and re-deposit into the same IRA is considered a tax-free rollover (if accomplished within 60 days). If the amount withdrawn from an IRA is not rolled over within the 60-day period to another IRA, it must be included in the individual’s gross income in the year of receipt. The IRS has very little authority to waive or grant extensions to the 60-day period.
Example:
Ted Zipp, age 64, received a distribution from his IRA on December 1, 2006. Ted failed to roll over the distribution by January 29, 2007 (the 60-day period). Thus, the distribution was includible in Ted's gross income for 2006 (i.e., the year the distribution was taken — not the end of the 60-day period). Likewise, if Ted had rolled over only a portion of the distribution, any amount he retained is taxable for 2006.
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All rollover distributions are subject to 20% income tax withholding. In effect, the IRS holds 20% of the distribution “hostage” against any tax liability owed on the rollover. If the individual accomplishes the rollover within 60 days, he or she may file for a refund from the IRS. However, this means that only 80% of the distribution is available for re-investment. The recipient may add additional personal funds to make up the difference, but this is not always convenient. The easiest way to avoid the withholding is to “transfer” the IRA assets, instead of rolling them over.
Transfers
IRAs and qualified plans, such as 401ks, and tax-sheltered annuities (TSAs), must provide recipients with the option of having distributions “transferred” directly to another eligible retirement plan.
A transfer differs from rollover in that the funds are paid directly from one IRA or another, rather than being paid to the account holder who then deposits the funds in another plan. The amount transferred is not included in the recipient's gross income. There is no limitation on how frequently individuals may direct their plan trustee or custodian to transfer their retirement plan assets. Direct transfers are not subject to income tax withholding. For these reasons, transfers are the preferred method of redeploying retirement plan assets.
A transfer may be accomplished by wiring a transfer directly to the recipient trustee or by mailing a check negotiable only by the recipient trustee. A plan administrator may also distribute a check to the account holder, with instructions to deliver the check to an eligible retirement plan. The “transfer check” must be payable to the trustee of the eligible retirement account for the benefit of (FBO) the recipient.
Example:
Jane Brown directs her employer's 401(k) plan to transfer funds to her IRA at ABC Brokerage. The plan's trustee may cut a check made out to: "ABC Broker as trustee of Individual Retirement Account of Jane Brown", give this check to Jane who delivers it to ABC.
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In either a rollover or transfer, the individual may choose to move only a portion of the account's assets. Previous rules limiting partial transfers of IRA assets no longer apply.
The following may not be rolled over or transferred:
required minimum distributions,
corrective distributions of excess contributions,
any distribution that is one of a series of substantially equal periodic payments made over the life of the employee or a period of at least 10 years, or
IRA balances inherited by a non-spouse beneficiary (a spouse who inherits an IRA may rollover the account).
Rollovers of Property
Sometimes a retirement plan trustee will distribute property other than cash to the account holder. In these cases, the account holder may rollover the property into another IRA. If property other than money is distributed to the individual from the old plan, the same property must be redeposited to the new plan. For example, if stock is received from the old IRA, the same stock must be rolled over to the new IRA.
Prohibited investments may not be rolled over. In the case of life insurance — which allowable in other qualified plans, but not IRAs — only the cash value of a surrendered life insurance policy may rollover into an IRA.
If a qualifying rollover distribution includes property, the employee is permitted to make a bona fide sale of the property and roll over, within the usual 60-day period after the distribution, the proceeds of the sale to an IRA.
Example:
On June 15, Ron Archer received a $90,000 lump-sum distribution from a his company's noncontributory profit-sharing plan, consisting of $50,000 cash and $40,000 of stock. On July 22, Archer sold the stock for $44,000. Archer may “rollover” $94,000 cash tax-free into his IRA. The $4,000 capital gain on the stock is not recognized and there is no tax on the lump-sum distribution, provided the rollover is completed by August 14th — 60 days after the distribution. (If the sale had resulted in a loss, it also would have been unrecognized.)
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Any distribution of property from a noncontributory qualified retirement plan that is not rolled over is taxed as ordinary income to the full extent of its fair market value. This becomes the “cost basis” of the property in the hands of the employee. Any gain or loss on a later sale is a capital gain or loss. The same principles will apply if only part of the assets are rolled over to an individual retirement plan.
Conduit IRAs
The tax code allows employees who change employers to move their retirement assets from the old employer’s plan and into the new. Sometimes, employees will temporarily place a distribution from the old employer’s plan into an IRA, and later transfer that to the new employer’s plan. This type of temporary “parking” of assets is a Conduit IRA. In order for the employee to be able to transfer the IRA assets to a new employer's qualified plan, the IRA assets must not be “contaminated” with other IRA contributions. For this reason, employees should set up a Conduit IRA exclusively for those assets that may be transferred to an employer's plan in the future.
Example:
Todd Fischer leaves the service of Toyco, Inc. and receives a lump-sum distribution of $100,000 from Toyco's tax-qualified, noncontributory plan. Todd immediately puts all of the $100,000 into a Conduit IRA. Five years later, Todd goes to work for Rivaltoy, Inc. If Rivaltoy’s plan permits it, Todd can rollover all or part of those assets to Rivaltoy's plan, provided the assets in his Conduit IRA represent only the distribution from his previous employer and subsequent earnings. As with any other rollover, the assets must be redeposited within 60 days.
If the Conduit IRA contains other assets, the rollover into Rivaltoy’s plan is not permitted. During the years between leaving Toyco and beginning employment with Rivaltoy, Todd may have wanted to contribute to an Individual Retirement Account. He could set up a separate IRA for this purpose, so as to not “contaminate” the Conduit IRA’s assets.
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A distribution from a qualified plan may be rolled over tax-free to multiple Conduit IRAs if completed within the 60-day period This enables an individual to utilize different kinds of IRAs and investment media. These IRAs will be eligible for later tax-free rollovers to another qualified plan if no additional contributions are made to them.
Please note: Unless the distribution from the old plan is a direct transfer to the Conduit IRA, it is subject to mandatory withholding of 20%. As a result, only 80% of the distribution is available in this in a rollover, unless the taxpayer puts additional funds, to offset the withholding, into the Conduit IRA.
SIMPLE IRA Distributions
Distributions from a SIMPLE account are generally taxed like distributions from an IRA. However, some special rules apply. During the first two years an individual participates in a SIMPLE IRA, the participant may roll over distributions from one SIMPLE IRA to another SIMPLE IRA tax free. A participant may roll over a distribution from a SIMPLE account to a "regular" IRA without penalty only if the individual has participated in the SIMPLE plan for two years.
Participants who take early withdrawals from a SIMPLE account (i.e.. before age 59½ with the usual exceptions) will be assessed a 25% penalty tax if the withdrawal takes place in the first two years of participation. Thereafter, the "normal" 10% penalty applies to premature distributions. The 25% tax does not apply to distributions made after the participant reaches age 59½, due to death or disability, etc., regardless of how long the individual participated in the SIMPLE plan. SIMPLE IRAs are discussed in Module 4
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