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Distribution from Qualified Plans and IRAs

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Title: Distribution from Qualified Plans and IRAs


1
Lesson 4
  • Distribution from Qualified Plans and IRAs
  • Choosing a Retirement Plan
  • Section 457 Plans

2
Distributions from Qualified Plans
  • All qualified plans must provide two forms of
    survivorship benefits for spouses (except certain
    profit-sharing plans)
  • Qualified pre-retirement survivor annuity
  • Qualified joint and survivor annuity

3
Pre-retirement Survivor Annuity
  • Once a participant is vested, the non-participant
    spouse acquires the right to a pre-retirement
    survivor annuity payable to the spouse in the
    event of the participants death before
    retirement.
  • This is an actual property right created by
    federal law that can be transferred at death.
  • This is equivalent to a term life insurance
    policy with an annuity as the pre-selected
    settlement death.

4
Qualified Joint and Survivor Annuity
  • This is a post-retirement death benefit for the
    plan participants spouse.

5
Distributions from Qualified Plans (cont)
  • Waiver of either the joint and survivor annuity
    (before or at retirement) requires the consent in
    writing, by the spouse witnessed by a notary or
    plan official and is irrevocable.

6
Distributions from Qualified Plans (cont)
  • Most of the plans not subject to minimum funding
    requirements are not required to provide a
    qualified pre-retirement survivor annuity or
    qualified joint and survivor annuity if certain
    requirements are met.
  • Here are the plans
  • Profit-sharing plans
  • Stock-bonus plans
  • ESOPs
  • 401(k)
  • Requirements include
  • Plan does not pay the participant a life annuity
    benefit and
  • The participants non-forfeitable accrued benefit
    is payable to the surviving spouse upon the
    participants death.

7
Distributions from Qualified Plans (cont)
  • Plan provisionsOther benefit options
  • A qualified plan can offer a wide range of
    distribution options.
  • A qualified plan must provide for direct
    rollovers of certain distributions.
  • Failure to elect a direct rollover (trustee to
    trustee) will subject the distribution to a
    mandatory 20 withholding for federal income tax
    (includes lump-sum distributions).
  • This rule does not relate to distributions from
    IRA accounts.

8
Defined-Benefit Plan Distribution Provisions
  • DB plans must provide a married participant with
    a joint and survivorship annuity as an automatic
    form of benefit.
  • For an unmarried participant, the plans
    automatic form of benefit is usually a
    single-life annuity.
  • To elect any option that eliminates the automatic
    benefit, the spouse must give consent on a
    notarized written form to waive the spousal right
    to the joint and survivor annuity.

9
Defined-Contribution Plan Distribution Provisions
  • DC plans include such plans as profit-sharing,
    401(k), and money-purchase. Section 403(b) TDAs
    also have similar distribution provisions.
  • Most DC plans provide annuity benefits like those
    of DB plans.
  • Money-purchase, target-benefit, and 403(b) plans
    subject to ERISA must meet the pre-retirement and
    joint-and-survivorship annuity rules.
  • For these purposes, these plans are pension plans
    as opposed to profit-sharing plans.

10
Nontaxable and taxable amountsCost Basis
  • Qualified plans may contain after-tax employee
    contributions (thrift plans, for example).
  • The first step in determining the amount subject
    to income tax for any plan distribution is to
    determine the participants cost basis in the
    plan benefits.
  • The participants cost basis includes
  • Total after-tax contributions made by the
    employee to a contributory plan.
  • Total cost of life insurance actually reported as
    taxable income on federal income tax returns by
    the participant if the plan distributions are
    received under the same contract that provides
    the life insurance protection.

11
Taxation of Annuity Payments
  • Amounts distributed as or from an annuity, are
    taxable in the year received except for a
    proportionate recovery of the adjusted taxable
    cost basis.
  • The cost basis is recovered as a part of each
    benefit payment through the calculation of an
    exclusion ratio and an inclusion ratio applied to
    each payment to determine the nontaxable and
    taxable amount.

12
Lump-Sum Distributions
  • Lump-sum distributions from a qualified plan may
    receive special tax treatment.
  • Generally, any distribution from a qualified plan
    will be taxed as ordinary income (with the
    exception of basis within the plan) and subject
    to ordinary income tax rates.
  • There are several important exceptions to the
    standard ordinary income treatment for lump-sum
    distributions, including
  • Ten-year forward averaging.
  • Pre-1974 capital gain treatment.
  • Treatment of distributions of employer securities
    (net unrealized appreciation treatment).

13
Lump-Sum Distributions Defined
  • A lump-sum distribution is a payment or
    distribution that occurs within one taxable year
    of the entire balance of the account or benefit
    of a participant from a qualified plan.

14
Requirements of A Lump-Sum Distribution
  • First, the entire amount of the employees
    benefits in the plan must be distributed.
  • Second, an election must be made by the
    participant or in the case of the participants
    death, by his or her estate within one year of
    receipt of the distribution.
  • The election is made by attaching Form 4972 to
    the taxpayers federal income tax return for the
    year in which the distribution occurred.
  • Third, the distribution must be due to one of the
    following
  • Employee death
  • Attainment of age 59 ½
  • Separates from service (not applicable to
    self-employed) or
  • Becomes disabled
  • Fourth, the employee participated in the plan for
    at least five taxable years prior to the tax year
    of distribution (a death benefit is exempted from
    this requirement).

15
Aggregation of Plans
  • In determining the total distribution, all
    pension plans maintained by the same employer are
    treated as a single plan.
  • A profit-sharing plan maintained by the same
    employer as the pension plan would NOT be counted
    as part of the pension plan.
  • All profit-sharing plans maintained by the
    employer shall be treated as a single plan.
  • All stock bonus plans maintained by the employer
    shall be treated as a single plan.

16
Ten-Year Forward Averaging
  • A plan participant is eligible to elect ten-year
    forward averaging if he or she attains age 50
    before January 1, 1986 (born before January 1,
    1936).
  • Using the ten-year forward averaging method, the
    tax on the lump-sum distribution may be lower
    than the tax would be if the distribution were
    included in current taxable income and taxed at
    ordinary income tax rates.

17
Ten-Year Forward Averaging (cont)
  • Under ten-year forward averaging, the income tax
    for the qualified plan distribution is calculated
    by determining the tax attributable to an amount
    equal to one tenth of the total distribution.
  • The tax on the 1/10th is then multiplied by 10 to
    determine the total tax due on the distribution.
  • The entire amount of tax on the lump-sum
    distribution must be paid in the year of the
    distribution.
  • Ten-year averaging does NOT allow the taxpayer to
    spread the tax payments over a ten-year period.

18
Ten-Year Forward Averaging (cont)
  • The benefit of ten-year forward averaging is that
    the taxpayer will avoid the distribution being
    taxed at higher income tax brackets.
  • Ten-year forward averaging is based on 1986 tax
    rates, NOT current tax rates.
  • The tax on the lump-sum distribution may NOT be
    lower under the 1986 rates.
  • Consideration must be given to current rates, and
    the method creating the lowest total tax should
    be utilized.
  • Exhibit (AZ) summarizes the steps used in
    Calculating ten-year forward averaging.
  • Example (BA) shows an example of 10-year forward
    averaging.

19
Pre-1974 Capital Gain Treatment
  • Participants born prior to January 1, 1936 are
    also eligible to treat the portion of a lump-sum
    distribution attributable to pre-1974
    participation in a qualified plan as a capital
    gain, subject to a tax at a 20 capital gain
    rate.
  • If the lump-sum distribution is received by a
    taxpayer who ceased participating in a qualified
    plan before 1974, then the entire distribution
    will be eligible for capital gain treatment.
  • However, if participation continued beyond 1973,
    there will be an ordinary income portion AND a
    capital gains portion.

20
Pre-1974 Capital Gain Treatment (cont)
  • The capital gains portion is determined as
    follows
  • The portion remaining is eligible for ten-year
    forward averaging.

21
Net Unrealized Appreciation (NUA)
  • Lump-sum distributions that consist entirely, or
    in part, as employer securities receive special
    tax treatment.
  • The portion of the distribution that is
    considered NUA is NOT taxed upon distribution of
    the securities.
  • The disposition of the securities will result in
    capital gains as opposed to ordinary income.

22
Net Unrealized Appreciation (NUA) (cont)
  • NUA is defined as the excess of the market value
    of the employer securities distributed over the
    cost or basis of the securities to the trust.
  • The cost or basis of the securities to the trust
    is generally the total value of the securities at
    the time of the contribution.
  • The cost or basis of the securities is taxed as
    ordinary income in the year of distribution.
  • However, this amount is eligible for ten-year
    forward averaging if the participant was born
    prior to January 1, 1936.
  • The NUA will be treated as long-term capital
    gain.
  • Any subsequent appreciation after the
    distribution of employer securities will be
    treated as long-term or short-term capital gain,
    depending on holding period since distribution.
  • See (BB) for an example.

23
Net Unrealized Appreciation (NUA) (cont)
  • Employer securities generally include stock of
    the corporation but may also include bonds or
    debentures of the employer.
  • Securities of the parent or subsidiary may also
    qualify as employer securities for NUA treatment.
  • If stock attributable to a distribution from a
    qualified plan is inherited, the portion that is
    treated as NUA will be treated as income in
    respect of a decedent.
  • Income in respect of a decedent means that the
    beneficiary will NOT receive a step-up in basis
    wit respect to the NUA.
  • As a result, the basis of the stock to the
    beneficiary will be equal to the value at the
    date of death less the amount that is treated as
    NUA.
  • See Example (BC).

24
Qualified Domestic Relations Order (QDRO)
  • In general, a qualified plan benefit CANNOT BE
    ASSIGNED OR ALIENATED by a participant,
    voluntarily or involuntarily.
  • This rule protects the participants retirement
    fund from attachment by creditors.
  • An exception to this rule applies to claims of
    spouses and dependents in domestic relations
    situations.
  • The exception permits an assignment of a
    qualified plan benefit under a Qualified Domestic
    Relations Order (QDRO).
  • A QDRO is a decree, order, or property settlement
    under state law relating to
  • Child support
  • Alimony
  • Marital property rights that assign part or all
    of a participants plan benefits to a spouse,
    former spouse, child, or dependent of the
    participant.
  • Distributions made to an alternate payee pursuant
    to a QDRO will NOT be subject to the 10 early
    withdrawal penalty.

25
Qualified Domestic Relations Order (QDRO)
  • IRAs, SEPs, and 403(b) plans are NOT qualified
    plans and therefore do not have the same
    protection from creditors.
  • Only qualified plan assets are protected from
    creditors because they are protected under ERISA.
  • However, some states now protect IRAs and SEPs
    from creditor alienation.

26
Retirement Plan Rollovers
  • Tax-free rollovers of distributions from
    qualified plans, IRAs, and SEPs, and Section
    403(b) tax-deferred annuity plans are
    specifically allowed by the IRS.
  • If the rollover is made within 60 days of receipt
    of the distribution and follows IRS rules, the
    tax on the distribution is deferred.
  • However, eligible rollover distributions from
    qualified plans and 403(b) TDAs are subject to
    mandatory withholding at 20, unless the rollover
    is effected by means of a direct
    (trustee-to-trustee) rollover.
  • The 20 mandatory withholding is NOT applicable
    to IRAs or SEPs.

27
IRA Rollovers
  • As an alternative to paying tax on a qualified
    plan distribution, individuals are able to defer
    taxation by rolling all or a portion of the
    distribution into an IRA or another qualified
    plan within 60 days of receipt of the
    distribution.
  • Once in the IRA, the benefits are NOT subject to
    income tax until they are withdrawn from the
    account.
  • They do, however, lose ERISA alienation
    protection and the ability to elect ten-year
    forward averaging, pre-1974 capital gain
    treatment, and net unrealized appreciation
    treatment.

28
IRA Rollovers (cont)
  • The following are not available for distributions
    from an IRA
  • Ten-year forward averaging.
  • Pre-1974 capital gains treatment.
  • Net unrealized appreciation treatment.
  • Recipients of a qualifying distribution can
    generally roll the benefit into another qualified
    plan.
  • Distributions rolled into an IRA Rollover Account
    can subsequently be rolled into another qualified
    plan.
  • An IRA Rollover Account maintains the integrity
    or character of the qualified plan distribution.
  • If qualified funds and nonqualified funds are
    commingled, a rollover into another qualified
    plan is generally NOT permitted

29
IRA Rollovers (cont)
  • Eligible rollover distributions FROM qualified
    retirement plans, section 403(b) plans, and
    governmental Section 457 plans generally can be
    rolled over TO any of such plans or arrangements.
  • Similarly, distributions from an IRA are
    generally permitted to be rolled over into a
    qualified plan, Section 403(b) plan, or
    governmental Section 457 plan.

30
Eligible Rollover Distributions
  • All distributions from qualified plans or
    tax-sheltered annuities are eligible rollover
    distributions except
  • Any distributiion that is one of a series of
    substantially equal periodic payments (not less
    frequently than annually) made for the life of
    the employee, or the joint lives of the employee
    and the employees designated beneficiary for a
    period of 10 years or more AND
  • Required distributions at age 70 ½.

31
Eligible Rollover Distributions (cont)
  • Plans are required to provide participants with
    the option to have eligible rollover
    distributions transferred directly to another
    plan or IRA.
  • Plans are NOT required to accept rollover
    contributions.
  • Direct transfers of distributions are
    distributions for purposes of the Retirement
    Protection Act (RPA).
  • The necessary spousal waivers must be secured in
    advance of the distribution.
  • Distributions NOT transferred directly to another
    qualified plan or IRA are subject to a mandatory
    20 withholding requirement.
  • Plans are required to provide participants with a
    written explanation of the direct transfer
    option, the mandatory withholding rule, and other
    rules relating to the taxation of the
    distribution.

32
Early Distribution Penalty
  • Generally, distributions from qualified plans,
    403(b) plans, and IRAs before the owner attains
    age 59 ½ are subject to an early distribution
    penalty.
  • The early distribution penalty is applied to the
    taxable portion of the distribution.
  • If the distribution includes after-tax
    (nondeductible) contributions, the after-tax
    portion will NOT be subject to the penalty.
  • See (BD) for an example
  • For SIMPLE plans, the penalty is 25 for
    distributions occurring within the first two
    years of initial participation in the plan.
  • After the first two years, the penalty for the
    SIMPLE reverts to a 10 penalty.

33
Exceptions to the Early Distribution Penalty
  • The penalty must be paid unless the plan owner
    qualifies for one of the following exceptions
  • After age 59 ½
  • To beneficiary after death
  • Disability
  • Part of a series of substantially equal periodic
    payments (SEPP) made at least annually over the
    life expectancy of the owner or the owner and a
    designated beneficiary
  • Made for medical expenses exceeding 7.5 of the
    owners adjusted gross income. The owner is NOT
    required to itemize deductions on his or her tax
    return to take advantage of the exception.

34
More about SEPPs
  • In the case of a qualified plan or 403(b), the
    participant must separate from service before
    taking substantially equal periodic payments.
  • Substantially equal payments must continue for
    the greater of
  • Five years or
  • Until age 59 ½

35
SEPPs (cont)
  • There are three methods for calculating
    substantially equal payments. These include
  • IRC Section 401(a)(9) methoddistributions are
    made over the remaining life expectancy.
  • Amortization methodamortize the participants
    account balance over a period of time equal to
    the life expectancy of the participant (or joint
    life expectancy with beneficiary).
  • Interest rate must be a reasonable rate of
    interest on the date the payments begin.
  • Annuity Methodthe participants account can be
    divided by an annuity factor to determine a
    payment.
  • A reasonable interest rate and a reasonable
    mortality table must be used in the calculation
    of the payment.

36
Exceptions to Early Distribution Penalty (cont)
  • The early withdrawal penalty will NOT apply to
    the following distributions from qualified plans
    and 403(b) plans
  • Made after separation from service after
    attainment of age 55.
  • Made to a qualifying family member under a
    Qualified Domestic Relations Order (QDRO).
  • The above does NOT apply to IRAs.

37
Exceptions to the Early Distribution Penalty for
IRAs only
  • These exceptions do NOT apply to qualified plans
    or 403(b) plans.
  • The exceptions
  • Distributions for higher education costs for
    taxpayer, spouse, child, or grandchild.
  • Distributions to pay certain acquisition costs of
    a first-time home buyer.
  • Up to 10,000 lifetime maximum.
  • A first-time home buyer is someone who has had no
    interest in a principal residence during the two
    years ending on the date of purchase of the new
    home.
  • The home buyer can be the IRA owner, spouse,
    child, or grandchild.
  • Distributions to pay health insurance premiums
    for unemployed individuals.

38
Rollovers
  • An IRA can be used to receive a certain
    distribution from employer-sponsored retirement
    plans.
  • Eligible Rollover distributions must be
    transferred to the IRA via a direct rollover or a
    transfer by the participant.
  • A direct rollover is an eligible rollover
    distribution that is paid directly to a rollover
    IRA for the benefit of the participant.
  • A direct rollover usually involves a wire
    transfer or a check that is negotiated only by
    the custodian of the IRA.
  • Transfers to an IRA through a direct rollover are
    NOT subject to a mandatory withholding of 20.
  • If the participant receives a distribution check
    payable to the participant, this is not
    considered a direct rollover.
  • In this situation the participant must compete
    the rollover within 60 days after the check is
    received.
  • Also, the check received may be subject to a
    mandatory withholding of 20.

39
Rollovers (cont)
  • Loans from a rollover IRA are NOT permitted.
  • Distributions from a rollover IRA do NOT qualify
    for ten-year forward averaging or lump-sum
    distributions.

40
Rollovers (cont)
  • For distributions after 2001, the following rules
    will apply to rollovers
  • Rollovers are allowed among qualified plans,
    403(b) plans, and Section 457 plans.
  • Distributions from an IRA generally are permitted
    to be rolled over into qualified plans, 403(b)
    plans, and Section 457 plans.
  • Employee after-tax contributions may be rolled
    over into another qualified plan or Traditional
    IRA.
  • In the case of a rollover of after-tax
    contributions from one qualified plan to another
    qualified plan, the rollover can only be
    accomplished through a direct rollover.
  • A qualified plan is NOT permitted to accept
    rollovers of after-tax contributions unless the
    plan provides separate accounting for such
    contributions and earnings.
  • After-tax contributions are NOT permitted to be
    rolled over from an IRA into a qualified plan,
    403(b) plan, or Section 457 plan.

41
Minimum Distributions
  • Participants in qualified plans, 403(b) plans,
    and owners of IRAs are required to take
    distributions from their plans.
  • The date at which distributions must begin is the
    Required Beginning Date.
  • After the required beginning date, if sufficient
    amounts are NOT withdrawn, a 50 excise tax will
    apply to any shortfall.
  • See Example (BE) regarding required minimum
    distributions from an IRA.

42
Minimum Distributions (cont)
  • Minimum required distributions do NOT apply to
    Roth IRAs while the Roth IRA owner is alive.

43
Minimum Distributions (cont)
  • Generally, the first distribution must be made by
    April 1 of the year after the year you reach age
    70 ½.
  • In subsequent years, the distributioin must be
    made by December 31.
  • The participant must determine the minimum amount
    required to be distributed each year.
  • The participant can always withdraw more than the
    required minimum distribution.

44
Minimum Distribution (cont)
  • If the first distribution is delayed to April 1
    following the year that the person reaches age 70
    ½, there must be two distributions in that
    calendar year (the second distribution must occur
    before December 31).
  • Participants in qualified plans and 403(b) plans
    can defer the required beginning date until April
    1 following the year of retirement, if the
    participant continues to work after attaining age
    70 ½. This deferral option is
  • NOT available for IRAs.
  • NOT available if the participant owns 5 or more
    of the business that sponsors the plan.
  • Therefore, NOT available for self-employed
    individuals.
  • ONLY available for the employers plan.
  • See Example (BF).

45
Determining the Minimum Distribution
  • The minimum required distribution (MRD) is
    determined each year by dividing the account
    balance (as of the close of business on December
    31st of the preceding year) by the distribution
    period.
  • The distribution period is determined by looking
    up the participants are, as of December 31st of
    the distribution year, in the Uniform
    Distribution Table (See (CF)).
  • The beneficiarys age is ignored when determining
    the distribution period (see exceptions below).
  • See Example (BG).

46
Determining the Minimum Distribution (cont)
  • The uniform distribution table is always used to
    calculate the minimum distribution, with one
    exception
  • If the participants designated beneficiary is
    the participants spouse, and the spouse is more
    than 10 years younger than the participant then
    actual joint life expectancies are used to
    calculate the minimum distribution.
  • This will result in a longer-life expectancy and
    a smaller minimum distribution.
  • See Example (BH).

47
Subsequent Year Distribution
  • To determine the required minimum distribution
    AFTER the first distribution year (the year the
    owner attains age 70 ½), reduce the account
    balance as of December 31 of the first year by
    any distribution for the first year made after
    December 31 of the current year.
  • No adjustment is necessary if the final
    distribution is received by December 31 of the
    year in which the participant attains age 70 ½.

48
Example of Minimum Distribution
  • See Example (BI).
  • This amount (from BI) must be distributed by Joe
    by April 1, 2003.
  • Assume Joes account balance as of December 31,
    2002 is 32000.
  • To figure the minimum amount that must be
    distributed for 2003, the IRA balance of 32,000
    must be reduced by the 1,186 required minimum
    distribution for 2002 that was made on April 1,
    2003.
  • Therefore, the account balance used to determine
    the required distribution for 2003 is 30,814
    (32,000 - 1,186, resulting in a required
    minimum distribution of 1,263 (30,814 / 24.4,
    the distribution period for a 72-year old).
  • This distribution must be made by December 31,
    2003.
  • Therefore, under this scenario, Joe will be
    making two distributiions in the 2003 calendar
    year (April 1 and December 31).
  • The reduction of the account balance by the first
    years minimum distribution only occurs in the
    second year and will occur only if the first
    distribution is deferred until after December 31
    of the year in which the participant attained age
    70 ½.

49
Distributions After Death
  • Determination of the designated beneficiary
  • The designated beneficiary is determined as of
    the end of the year (December 31) following the
    year of the participants death.
  • Plans may disregard any beneficiary eliminated by
    disclaimer or distribution of the benefits during
    the period between the participants death and
    December 31 of the following year.
  • If there is more than one designated beneficiary,
    the beneficiary with the shortest life expectancy
    is used as the measuring life.

50
Determining the Designated Beneficiary (cont)
  • If a trust is named as the beneficiary, the
    beneficiaries of the trust will be treated as
    designated beneficiaries as long as
  • The trust is valid under state law.
  • The trust is irrevocable or will be so upon the
    participants death.
  • The beneficiaries of the trust are identifiable
    from the trust document, and
  • Appropriate documentation has been provided to
    the plan administrator.

51
Death Before Required Beginning Date
  • Distribution rules differ depending on whether
    there is
  • Spouse beneficiary
  • Non-spouse beneficiary
  • No designated beneficiary
  • (rules for each follow)

52
Death Before Required Beginning Datespouse
beneficiary
  • The surviving spouse can receive distributions
    over his/her remaining single-life expectancy,
    recalculated each year.
  • The surviving spouse can roll the plan balance
    over, and wait until he/she attains age 70 ½ to
    begin taking minimum distributions.
  • The surviving spouse can elect to distribute the
    entire account balance within five years after
    the year of the owners death (five-year rule).
  • This election can only be made if the plan
    provision allows the five-year rule.

53
Death Before Required Beginning Datenon-spouse
beneficiary
  • Distribution period is the remaining life
    expectancy of the designated beneficiary.
  • life expectancy is calculated using the age of
    the designated beneficiary in the year following
    the year of the employees death, reduced by one
    for each subsequent year.
  • Beneficiary can elect to distribute the entire
    balance within five years after the year of the
    owners death (five-year rule).
  • This election can only be made if the plan
    provision allows the five-year rule.

54
Death Before Required Beginning DateNO
designated beneficiary
  • The account must be fully distributed before the
    end of the fifth year following the year of death.

55
Death AFTER Required Beginning DateSpouse
Beneficiary
  • Surviving spouse can receive distributions over
    his or her remaining single-life expectancy,
    recalculated each year.
  • Distributions must begin in the year following
    the year of death.
  • Surviving spouse can rollover the plan balance
    and wait until he or she attains age 70 ½ to
    begin taking minimum distributions.
  • This election may only be made if the surviving
    spouse is the sole beneficiary.

56
Death AFTER Required Beginning DateNon-spouse
Beneficiary
  • Distribution period is the remaining life
    expectancy of the designated beneficiary.
  • Life expectancy is calculated using the age of
    the designated beneficiary in the year following
    the year of the employees death, and is reduced
    by one for each subsequent year.

57
Death AFTER Required Beginning DateNo Designated
Beneficiary
  • Distribution must continue over the remaining
    distribution period of the deceased owner.
  • The distribution period is reduced by one each
    year (do NOT use the Uniform Distribution Table).
  • See (BJ) for a summary of all the distribution
    rulesbefore and after death.

58
Choosing A Retirement Plan
  • Steps are
  • First, Establish Objectives of the Plan.
  • Second, Identify the types of plans that can meet
    the objectives.
  • Third, evaluate the list of plans for financial
    feasibility.
  • Fourth, forecast costs and benefits for the
    foreseeable future for each different plan.

59
Sample Objectives for Plans
  • Benefit all employees.
  • Benefit a select group (nonqualified plans).
  • Attract, retain, or retire workers.
  • Tax-advantaged tool.

60
Types of plans that can meet objectives
  • Prepare an employee census to forecast the
    financial impact of alternative plans.
  • Assess each plans financial characteristics
  • Contribution costs.
  • Costs of administration.
  • Flexibility of contribution.
  • Burden of investment risk.
  • Risk of benefit account.
  • Company profits and stability of cash flows.

61
Examples of Choosing a Plan
  • See Examples (BK) through (BO).

62
Section 457 Plans
  • Definition A deferred compensation plan of
    government units, governmental agencies, and
    non-church controlled, tax exempt organizations.
  • NOT a qualified plan.

63
457 Plan Characteristics
  • The amount deferred annually by an employee
    cannot exceed the lesser of
  • 12,000 (2003) or
  • 100 (2003) of the employees compensation
    currently includible in gross income.
  • Individuals who have attained age 50 may make
    additional catch-up contributions.
  • The additional catch-up amount is 2,000 (2003),
    3,000 (2004), 4,000 (2005), and 5,000 (2006).
  • Table (BP) summarizes the contributions allowed
    for 457 plans.

64
Additional 457 Contribution Rules
  • The contribution limit is doubled in the three
    years prior to an individuals retirement.
  • During this three-year period (before
    retirement), the catch-up rule does NOT apply.
  • An income tax credit is allowed for certain
    taxpayers with respect to elective contributions
    to a 457 plan.
  • See Table (AE) and 401(k) discussion earlier.

65
457 Salary Reduction Elections
  • Employee elections to defer compensation monthly
    under Section 457 must be made under an agreement
    entered into prior to earning the compensation.

66
457 Distribution Requirements
  • Plan distributions CANNOT be made before one of
    the following
  • Calendar year in which the employee attains age
    70 ½.
  • Separation from service.
  • An unforeseeable emergency as defined in the
    regulations.
  • In-service withdrawals ARE allowed for accounts
  • Distributions must begin no later than April 1st
    of the calendar year following the year in which
    the plan participant attains age 70 ½.
  • Minimum distributions must be made under the
    rules of Code Section 401(a)(9).
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