12/31/14. Retirement Account Distributions. General IRA Rules. Traditional IRA Distributions p. 90. Required Minimum Distributions [RMD]:

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1 Retirement Account Distributions Chapter 8 Pages General IRA Rules Required Minimum Distributions [RMD]: Traditional IRA Yes ROTH IRA - for contributor and spouse No - for non-contributor Yes Traditional IRA Distributions p Distribution requirements applies to the total of all non-roth IRA accounts: a. Traditional IRA b. SIMPLE IRA c. SEP-IRA 2. Non-deductible IRA amounts at measurement period reduce the taxable IRA portion. 3. Example: if 10% of total funds was nondeductible, only 90% of distribution is taxable. 1

2 ROTH Distibutions p. 91 Order of distribution: 1. Original contribution. 2. Conversions. 3. Earnings. An original ROTH contribution dollar at any time without penalty. Taxes/penalties only apply to values that exceed contributions. ROTH Distributions/Conversions Penalties p Distributions from an original ROTH prior to completion of 5 year period subjects earnings to a 10% penalty plus taxation. 2. Distributions from a ROTH conversion prior to completion of a 5 year period subjects the entire distribution to the 10% penalty, plus tax on the earnings. Distributions prior to 5 year investment period p. 92 Original Contribution/ Conversion amount Original ROTH ROTH Conversion $ 100,000 $ 100,000 Earnings 12,000 12,000 Distribution prior to 5 year investing period penalty: 10% on earnings amount ( 1,200) ( 1,200) 10% on conversion amount - ( 10,000) Distribution net of penalties $110,800 $ 100,800 Amount subject to regular taxation $ 12,000 $ 12,000 2

3 Minimum Distribution Rules p. 93 Contributor: ROTH 401-K Others Required Minimum No Yes* Yes** *When work stops **Age 70.5 Beneficiary: Required Minimum Yes Yes Yes Required Minimum Distribution See Life Tables Appendix C Pub 590 Value of All Accounts at Prior Year December 31 $ 100,000 Age at Distribution 71 Factor at Distribution Age 26.5 Calculation: $ 100,000/26.5 = $ 3,774 Qualified Longevity Annuity Contracts [QLAC] p New as of 07/02/ Allows IRAs/SEPS/401(k)/403/457 amounts to be converted to an annuity to begin by Age Limited to lesser of $ 125,000 or 25% of Retirement Account Values. 4. QLAC amounts are not included in calculation of RMD of other funds. 3

4 Qualified Longevity Annuity Contracts [QLAC] p The plan s purpose is to provide another way of assuring that: a. IRA will not run out of funds before IRA owner runs out of life. b. Minimize current taxation. c. Reduce Medicare premium cost. 2. May contain a return-of-premium feature to guarantee 100% payments before death probable insurance cost. Marty s $ 500,000 IRA split into $ 375,000 IRA plus QLAC of $ 125,000 p. 94 No QLAC With QLAC Annual RMD $ 16,368 to $ 12,276 to $ 18,248 $ 13,686 Average Distributions $ 17,490 $ 13,133 Total Distributions $ 262,657 $ 196,993 Total Tax at 15% $ 39,399 $ 29,549 Balance at Age 85 $ 237,343 $ 178,007 Annuity Value - $ 125,000 Interest at 4% per year - $ 75,000 Total Value at Age 85 $ 237,343 $ 378,007 Beneficiary Distribution Rules Based Upon Owner s Death Spouse Others Pre-RBD: 1. Rollover Option No 2. Base Distributions upon: a. Deceased s 70.5 year Option No b. New owner s expected life Option Yes c. Year following deceased s death N/A Yes After RBD: 1. Rollover to Spouse Yes N/A 2. Use New Owner s expected life Yes Option 3. Use Deceased s life if younger N/A Option 3. Use Beneficiary Table N/A Yes 4

5 Life Expectancy Tables Per $ 100,000 IRA Current Life RMD Age Expectancy RMD % Dollars , , , , , , year Stretch IRA: Assume value of $ 100,000 at age: Age Remainder Age Remainder 80 94, , , , , , , , , ,262 Note: Does not include compound interest effect. IRA/RMD in a bad stock market: Transfer to Taxable Account; don t sell it. Good Bad Transfer Value $ 10,000 $ 6,000 $ 6,000 Growth - - 4,000 Total 10,000 6,000 10,000 Basis - - ( 6,000) Taxable 10,000 6,000 4,000 Tax ( 2,500)* (1,500)* ( 600)** Net Cash $ 7,500 $ 4,500 $ 9,400 Trans. Tax - - (1,500) After Tax $ 7,500 $ 4,500 $ 7,900 * 25% ordinary ** 15% capital 5

6 Spousal Consent Rules p For Qualified Plans other than IRAs spouse must consent to: a. Distributions. b. Plan loans. 2. For IRAs, account owner free to determine distributions and name beneficiaries. Substantial Periodic Payments p. 107 Plan distributions may be made prior to age 59 ½ without penalty if: a. Substantially equal payments; and, b. For at least the later of: (1) Five years; or, (2) Age 59 ½. Exceptions: Premature Distributions p IRA Only: Medical Expenses above 10% AGI. 2. Federal levies. 3. Reservist post 9/1/01 active 179 days. 4. Other than IRA: Service Separation a. All workers: Age 55 or later. b. Public safety worker: Age 50/later. 6

7 Exceptions: Premature Distributions p IRA Only: Unemployed 12 consecutive weeks and used for Rx insurance. 6. IRA Only: First time homebuyer: a. Lifetime limit up to $ 10,000. b. No home ownership prior 2 years. c. Funds used within 120 days. Exceptions: Premature Distributions p IRA Only: Higher education expense applied during year of withdrawal. Self-Funding a C Corp p Get new or existing C Corp to set up a retirement plan. 2. Rollover IRA or 401-K into C Corp pension plan. [Rollover Business Startup allowed under Reg ] 3. Have pension purchase stock in C Corp; cash goes to C Corp checking. 7

8 Rollovers p Rollovers allowed: a. To an IRA from a defined contribution plan. b. To a defined contribution plan from an IRA. c. To a SIMPLE IRA only from a SIMPLE IRA. d. From a SIMPLE IRA to any qualified plan after 2 years from its creation date. 2. The non-deductible portion of an IRA can only be rolled into another IRA. Rollover Rules 1. An IRA to IRA rollover is allowed once in any 365 day period. 2. Rollover from a non-ira plan into an IRA does not count for the one rollover per year limit. 3. Funds re-deposited within 60 days are not taxed or penalized, but, such funds count against the one rollover per limit rule. Example Rollover IRA 1 IRA 2 IRA 3 Balance 1/1 $ 200,000 $ 100,000 $ -0- Withdraw 8/1 ( 20,000) - - Contribute 8/ $ 20,000 Withdraw 10/30 (50,000) - - Contribute 10/30 - $ 50,000 - Notes: 1. August transactions meet 60 day test. No tax. 2. October transactions constitute: a. Violation of the once per year rollover rule. b. Fully taxable transfer. c. Excess contribution subject to 6% penalty. 8

9 Rollover Example: p IRA account consists of: Deductible Contributions $ 100,000 Earnings 20,000 Non-deductible amount 30,000 $ 150, Rollover: To any qualified plan $ 120,000 To a ROTH IRA 30,000 $ 150,000 Law Change Alert 1. Prior to 2015 IRA position has been one rollover per IRA account per year. 2. Effective 1/1/2015, all IRA accounts are to be aggregated for the one rollover per year rule. (IRS Ann ). 3. Still time before 12/31/2014 to rollover multiple IRA accounts. SIMPLE IRA Rollover p Without penalty, to another SIMPLE IRA. 2. Must meet 2 year rule; premature amount is subject to 25% penalty. 3. After two years, any other premature distribution is subject to just a 10% penalty. 4. A transfer within the two year period is not a rollover. 9

10 Premature Transfer from SIMPLE IRA to Traditional IRA p.116 Withdrawal Penalties Contribution Penalty Total Effect Withdrawal $ 8,000 $ 8,000 $ 8,000 Tax 20% [Estimate] 25% [Actual] Net Cash $ 4,400 (1,600) (1,600) (2,000) (2,000) Contribution Limit (5,500) Excess contribution $ 2,500 Penalty at 6% [Actual] $ 150 (150) Cash Value $ 4,250 10