Magical Mystery Tour: An Introduction to IRA and Retirement Plan Basics

Presented by:Dennis M. Sandoval, J.D., LL.M. (Tax), CELA, EA

Director of EducationAmerican Academy of Estate Planning Attorneys

Presented by:Dennis M. Sandoval, J.D., LL.M. (Tax), CELA, EA

Director of EducationAmerican Academy of Estate Planning Attorneys

Overview of Retirement Assets

What are Retirement Assets? Individual Retirement Accounts SEP-IRAs / Simple Plans / Keoghs 403(b) Plan 457 Plan Qualified Plans

Money Purchase Profit Sharing 401(k) Plan

What are Retirement Assets? Individual Retirement Accounts SEP-IRAs / Simple Plans / Keoghs 403(b) Plan 457 Plan Qualified Plans

Money Purchase Profit Sharing 401(k) Plan

Income in Respect of a Decedent (IRD) No step-up in basis under IRC § 1014 Taxed to beneficiary as ordinary income when

distributed from a retirement plan

Most heavily taxed assets, with double or triple taxation possible: Income, Estate, GST

Income in Respect of a Decedent (IRD) No step-up in basis under IRC § 1014 Taxed to beneficiary as ordinary income when

distributed from a retirement plan

Most heavily taxed assets, with double or triple taxation possible: Income, Estate, GST

IRD Deduction Income tax deduction allowed for federal estate taxes

attributable to the Retirement Assets. IRC § 691(c) Deduction =

Difference between Federal Estate tax w/ Retirement Assets included and Federal Estate tax w/o Retirement Assets included

Treas. Reg. § 1.691(c)-1(a)

IRD Deduction Income tax deduction allowed for federal estate taxes

attributable to the Retirement Assets. IRC § 691(c) Deduction =

Difference between Federal Estate tax w/ Retirement Assets included and Federal Estate tax w/o Retirement Assets included

Treas. Reg. § 1.691(c)-1(a)

Options for Distributions from Qualified Plans Joint and Survivor Annuity Single Life Annuity Period Certain Annuity Lump Sum

Options for Distributions from Qualified Plans Retirement Equity Act (“REA”)

most qualified plan benefits of a married person must be paid as a joint and survivor annuity with payments to the spouse equal to 50% of the benefits paid during the participant’s life

Modification allowed after participant is 35 or over, but only with consent of spouse

IRC §§ 401(a)(11); 417(a)(6)(B)

Options for Distributions from Qualified Plans Retirement Equity Act (“REA”)

most qualified plan benefits of a married person must be paid as a joint and survivor annuity with payments to the spouse equal to 50% of the benefits paid during the participant’s life

Modification allowed after participant is 35 or over, but only with consent of spouse

IRC §§ 401(a)(11); 417(a)(6)(B)

Rollover Options Distribution from Qualified Plan or IRA is eligible to

rollover to IRA unless: One of a series of payments taken over single or joint life

expectancies One of a series of payments received for a specified period of

ten years or more A Required Minimum Distribution (“RMD”)

IRC §§ 402(c)(1) and (4)

Rollover Options Distribution from Qualified Plan or IRA is eligible to

rollover to IRA unless: One of a series of payments taken over single or joint life

expectancies One of a series of payments received for a specified period of

ten years or more A Required Minimum Distribution (“RMD”)

IRC §§ 402(c)(1) and (4)

Rollover Options Subject to 20% withholding for income tax Sixty Day Requirement

IRA can waive. See Rev. Rul. 2003-16 Trustee to trustee transfers

Rollover Options Subject to 20% withholding for income tax Sixty Day Requirement

IRA can waive. See Rev. Rul. 2003-16 Trustee to trustee transfers

Required Beginning Date (“RBD”) April 1st of calendar year AFTER the calendar year in which

participant reaches age 70 ½

John is born 6/30/1934, so he turns 70 on 6/30/2004 and age 70 ½ on 12/30/2004 – first Required Minimum Distribution (“RMD”) on April 1, 2005

John is born 7/1/1934, so he turns 70 on 71/2004 and age 70 ½ on 1/1/2005 – first RMD on April 1, 2006

Required Beginning Date (“RBD”) April 1st of calendar year AFTER the calendar year in which

participant reaches age 70 ½

John is born 6/30/1934, so he turns 70 on 6/30/2004 and age 70 ½ on 12/30/2004 – first Required Minimum Distribution (“RMD”) on April 1, 2005

John is born 7/1/1934, so he turns 70 on 71/2004 and age 70 ½ on 1/1/2005 – first RMD on April 1, 2006

Required Beginning Date If participant is not retired at 70½ and is not a 5%

owner, then RMDs from QUALIFIED PLANS (not IRAs) can be postponed until April 1 of year after participant retires

Required Beginning Date If participant is not retired at 70½ and is not a 5%

owner, then RMDs from QUALIFIED PLANS (not IRAs) can be postponed until April 1 of year after participant retires

Required Minimum Distributions (“RMD”) Once participant has reached RBD

Must take annual Required Minimum Distributions Based on the IRS Uniform Distribution Table EXCEPT:

May use joint table if spouse is more than 10 years younger than participant

Required Minimum Distributions (“RMD”) Once participant has reached RBD

Must take annual Required Minimum Distributions Based on the IRS Uniform Distribution Table EXCEPT:

May use joint table if spouse is more than 10 years younger than participant

Uniform Table

Age RMD Age RMD Age RMD Age RMD Age RMD

70 27.4 79 19.5 88 12.7 97 7.6 106 4.2

71 26.5 80 18.7 89 12.0 98 7.1 107 3.9

72 25.6 81 17.9 90 11.4 99 6.7 108 3.7

73 24.7 82 17.1 91 10.8 100 6.3 109 3.4

74 23.8 83 16.3 92 10.2 101 5.9 110 3.1

75 22.9 84 15.5 93 9.6 102 5.5 111 2.9

76 22.0 85 14.8 94 9.1 103 5.2 112 2.6

77 21.2 86 14.1 95 8.6 104 4.9 113 2.4

78 20.3 87 13.4 96 8.1 105 4.5 114+ 2.1

Selected Excerpt from Joint Table

Ages 50 51 52 53 54 55 56 57 58

70 35.1 34.3 33.4 32.6 31.8 31.1 30.3 29.5 28.8

71 35.0 34.2 33.3 32.5 31.7 30.9 30.1 29.4 28.6

72 34.9 34.1 33.2 32.4 31.6 30.8 30.0 29.2 28.4

73 34.8 34.0 33.1 32.3 31.5 30.6 29.8 29.1 28.3

74 34.8 33.9 33.0 32.2 31.4 30.5 29.7 28.9 28.1

75 34.7 33.8 33.0 32.1 31.3 30.4 29.6 28.8 28.0

76 34.6 33.8 32.9 32.0 31.2 30.3 29.5 28.7 27.9

77 34.6 33.7 32.8 32.0 31.1 30.3 29.4 28.6 27.8

78 34.5 33.6 32.8 31.9 31.0 30.2 29.3 28.5 27.7

Penalties 50% penalty for failure to take RMD

IRC § 4974 10% penalty for taking a distribution before age 59½

IRC § 72

Penalties 50% penalty for failure to take RMD

IRC § 4974 10% penalty for taking a distribution before age 59½

IRC § 72

Relief from 50% Penalty “Reasonable Cause”

Exceptions to 10% Penalty Paid to estate or beneficiary Disability Series of Substantially equal periodic payments Medical care, but not in excess of medical expense

deductions for the year

Exceptions to 10% Penalty Paid to estate or beneficiary Disability Series of Substantially equal periodic payments Medical care, but not in excess of medical expense

deductions for the year

Exceptions to 10% Penalty, continued Higher education expenses (IRA only) Qualified acquisition costs for principal residence for

participant or family member – max. $10,000 (IRA only)

Separation of service after age 55 (Qualified Plan only)

Exceptions to 10% Penalty, continued Higher education expenses (IRA only) Qualified acquisition costs for principal residence for

participant or family member – max. $10,000 (IRA only)

Separation of service after age 55 (Qualified Plan only)

Distributions at DeathDistributions at Death

Determination of Beneficiary Beneficiary to be determined by September 30th of

year after participant’s death Allows participant to change designated beneficiaries after

RBD without increasing RMDs Allows beneficiaries to be changed after death of participant,

such as by disclaimer or by distribution in satisfaction prior to September 30

Useful where trust is named as beneficiary and stretch-out for some trust beneficiaries is desired or where a charity is named as a trust beneficiary

Determination of Beneficiary Beneficiary to be determined by September 30th of

year after participant’s death Allows participant to change designated beneficiaries after

RBD without increasing RMDs Allows beneficiaries to be changed after death of participant,

such as by disclaimer or by distribution in satisfaction prior to September 30

Useful where trust is named as beneficiary and stretch-out for some trust beneficiaries is desired or where a charity is named as a trust beneficiary

Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can “rollover” the decedent’s

IRA to his or her own IRA No RMDs until age 70 ½ Use Uniform Table Can name new beneficiaries to take at death

Spouse as Beneficiary Spouse must be sole beneficiary of IRA Only beneficiary that can “rollover” the decedent’s

IRA to his or her own IRA No RMDs until age 70 ½ Use Uniform Table Can name new beneficiaries to take at death

Spousal Inherited IRA Death Before RBD

Surviving spouse can take distributions based on his or her life expectancy, but can delay taking distributions until the deceased spouse would have reached age 70 ½

Use Single Life Expectancy Table Recalculate each year Can name new beneficiaries to take at death

Spousal Inherited IRA Death Before RBD

Surviving spouse can take distributions based on his or her life expectancy, but can delay taking distributions until the deceased spouse would have reached age 70 ½

Use Single Life Expectancy Table Recalculate each year Can name new beneficiaries to take at death

Spousal Inherited IRA Death After RBD

Distributions based on the longer of spouse’s or participant’s life expectancy

Can can delay taking distributions until the deceased spouse would have reached age 70 ½

Use Single Life Expectancy Table If using spouse’s life expectancy, recalculate each year.

If using participant’s life expectancy, then find age at date of death, then subtract one each year

Can name new beneficiaries to take at death

Spousal Inherited IRA Death After RBD

Distributions based on the longer of spouse’s or participant’s life expectancy

Can can delay taking distributions until the deceased spouse would have reached age 70 ½

Use Single Life Expectancy Table If using spouse’s life expectancy, recalculate each year.

If using participant’s life expectancy, then find age at date of death, then subtract one each year

Can name new beneficiaries to take at death

Inherited IRA (Beneficiary Other Than Spouse) Death Before RBD

Option 1: Distributions based on beneficiary’s life expectancy Must take first distribution by December 31st of year after

participant’s death Use Single Life Expectancy Table Find age at date of death, then subtract one each year Can name new beneficiaries to take at death, or

Option 2 Five-Year Rule

Inherited IRA (Beneficiary Other Than Spouse) Death Before RBD

Option 1: Distributions based on beneficiary’s life expectancy Must take first distribution by December 31st of year after

participant’s death Use Single Life Expectancy Table Find age at date of death, then subtract one each year Can name new beneficiaries to take at death, or

Option 2 Five-Year Rule

Inherited IRA (Beneficiary Other Than Spouse) Death After RBD

Option 1: Distributions based on longer of beneficiary’s life expectancy or the life expectancy of the participant as of the year of death

Must take first distribution by December 31st of year after participant’s death

Use Single Life Expectancy Table, or Option 2

Five-Year Rule

Inherited IRA (Beneficiary Other Than Spouse) Death After RBD

Option 1: Distributions based on longer of beneficiary’s life expectancy or the life expectancy of the participant as of the year of death

Must take first distribution by December 31st of year after participant’s death

Use Single Life Expectancy Table, or Option 2

Five-Year Rule

Five Year Rule No set schedule of distributions, but the Retirement

Asset must be fully distributed to beneficiaries no later than December 31 of the year five years from the date of the participant’s death.

Five Year Rule No set schedule of distributions, but the Retirement

Asset must be fully distributed to beneficiaries no later than December 31 of the year five years from the date of the participant’s death.

Single Life Expectancy Table for Inherited IRAsAge RMD Age RMD Age RMD Age RMD Age RMD

20 63.0 29 54.3 38 45.6 47 37.0 56 28.7

21 62.1 30 53.3 39 44.6 48 36.0 57 27.9

22 61.1 31 52.4 40 43.6 49 35.1 58 27.0

23 60.1 32 51.4 41 42.7 50 34.2 59 26.1

24 59.1 33 50.4 42 41.7 51 33.3 60 25.2

25 58.2 34 49.4 43 40.7 52 32.3 61 24.4

26 57.2 35 48.5 44 39.8 53 31.4 62 23.5

27 56.2 36 47.5 45 38.8 54 30.5 63 22.7

28 55.3 37 46.5 46 37.9 55 29.6 64+ 21.8

Single Life Expectancy Table for Inherited IRAsAge RMD Age RMD Age RMD Age RMD Age RMD

65 21.0 74 14.1 83 8.6 92 4.9 101 2.7

66 20.2 75 13.4 84 8.1 93 4.6 102 2.5

67 19.4 76 12.7 85 7.6 94 4.3 103 2.3

68 18.6 77 12.1 86 7.1 95 4.1 104 2.1

69 17.8 78 11.4 87 6.7 96 3.8 105 1.9

70 17.0 79 10.8 88 6.3 97 3.6 106 1.7

71 16.3 80 10.2 89 5.9 98 3.4 107 1.5

72 15.5 81 9.7 90 5.5 99 3.1 108 1.4

73 14.8 82 9.1 91 5.2 100 2.9 111+ 1.0

No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust

Participant Dies Before RBD Five-Year Rule

Participant Dies After RBD Option 1

Remainder of participant’s life expectancy, or Option 2

Five-Year Rule

Participant Dies Before RBD Five-Year Rule

Participant Dies After RBD Option 1

Remainder of participant’s life expectancy, or Option 2

Five-Year Rule

Death Before RBD Death On or After RBD

SpouseRollover – Uniform TableOtherwise, Spouse’s Life Expectancy Recalculated

Rollover- Uniform Table Otherwise, Greater of Spouse’s or Participant’s Life Expectancy

Non-Spouse Beneficiary’s Life Expectancy Greater of Beneficiary’s or Participant’s Life Expectancy

Non-Qualified

5-Year Rule Life Expectancy of Participant or 5-Year Rule

Proper Titling for Inherited IRA John Doe (Deceased) IRA fbo Mary Doe John Doe (Deceased) IRA fbo Mary Doe, Trustee

under the John Doe Trust dated January 1, 1985 John Doe (Deceased) IRA fbo Mary Doe, Trustee of

the Jane Doe Trust created under the John Doe Trust dated January 1, 1985

NOT “Mary Doe” (unless spousal rollover)

Proper Titling for Inherited IRA John Doe (Deceased) IRA fbo Mary Doe John Doe (Deceased) IRA fbo Mary Doe, Trustee

under the John Doe Trust dated January 1, 1985 John Doe (Deceased) IRA fbo Mary Doe, Trustee of

the Jane Doe Trust created under the John Doe Trust dated January 1, 1985

NOT “Mary Doe” (unless spousal rollover)

Reasons to Name a Trust as Beneficiary of Retirement

Assets

Reasons to Name a Trust as Beneficiary of Retirement

Assets

Protect Retirement Assets Minor beneficiaries Special needs beneficiaries Spendthrift beneficiaries Asset Protection

Children from a Previous Marriage Under-funded Credit Shelter or Bypass Trust

Protect Retirement Assets Minor beneficiaries Special needs beneficiaries Spendthrift beneficiaries Asset Protection

Children from a Previous Marriage Under-funded Credit Shelter or Bypass Trust

Qualified DesignatedBeneficiary Trust

Funding Bypass Trust Using Disclaimed IRAFunding Bypass Trust Using Disclaimed IRA

H IRA$1 million

Living Trust$3 million

Bypass Trust

$1.5 million +$500,000

Survivor’sTrust

$1.5 million

W Rollover$500,000Disclaim$500,000

Funding Bypass Using Spousal GPOA – PLR 200101021Funding Bypass Using Spousal GPOA – PLR 200101021

H IRA$1 million

Bypass Trust

$2 million

Survivor’sTrust

$1 million

W Rollover$1 million

Funding Bypass Using Aggregate Community Property AgreementFunding Bypass Using Aggregate Community Property Agreement

H IRA$1 million

Bypass Trust

$2 million

Survivor’sTrust

$1 million

W Rollover$1 million

Look through to trust beneficiaries, if: Trust is valid under state law Trust is irrevocable or becomes irrevocable by

participant’s date of death All beneficiaries are identifiable under the terms of the

trust A copy of the trust document is provided to the plan

administrator or IRA custodian by no later than October 31 of the calendar year after the death of the participant

Look through to trust beneficiaries, if: Trust is valid under state law Trust is irrevocable or becomes irrevocable by

participant’s date of death All beneficiaries are identifiable under the terms of the

trust A copy of the trust document is provided to the plan

administrator or IRA custodian by no later than October 31 of the calendar year after the death of the participant

Look through beneficiaries Use the life expectancy of oldest beneficiary to

determine RMDs Treas. Reg. § 1.401(a)(9)-4 Q&A-5(c)

The separate account rules under A-2 of § 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust’s interest in the employee’s benefit

Contra – PLR 200234074

Look through beneficiaries Use the life expectancy of oldest beneficiary to

determine RMDs Treas. Reg. § 1.401(a)(9)-4 Q&A-5(c)

The separate account rules under A-2 of § 1.401(a)(9)-8 are not available to beneficiaries of a trust with respect to the trust’s interest in the employee’s benefit

Contra – PLR 200234074

Who is the oldest look through beneficiary? CAUTION: “Accumulation” Trusts

PLR 200228025 Solution:

Limit potential beneficiaries “Conduit” Trust

Who is the oldest look through beneficiary? CAUTION: “Accumulation” Trusts

PLR 200228025 Solution:

Limit potential beneficiaries “Conduit” Trust

Look through beneficiaries CAUTION: “Atom Bomb” Beneficiaries

Solution – Limit to younger beneficiaries for purposes of distributing retirement assets

CAUTION: Powers of Appointment Solution – Limit powers of appoint to younger beneficiaries

for purposes of appointing retirement assets

Look through beneficiaries CAUTION: “Atom Bomb” Beneficiaries

Solution – Limit to younger beneficiaries for purposes of distributing retirement assets

CAUTION: Powers of Appointment Solution – Limit powers of appoint to younger beneficiaries

for purposes of appointing retirement assets

Look through beneficiaries CAUTION: Using retirement assets to pay trustor’s

debts, estate taxes or administration expenses = paying to estate of the trustor, i.e., no designated beneficiary

Solution: Prohibit use of retirement assets to pay for debts, estate

taxes or administration expenses, unless these payments can be made prior to September 30 of year after the trustor dies

Look through beneficiaries CAUTION: Using retirement assets to pay trustor’s

debts, estate taxes or administration expenses = paying to estate of the trustor, i.e., no designated beneficiary

Solution: Prohibit use of retirement assets to pay for debts, estate

taxes or administration expenses, unless these payments can be made prior to September 30 of year after the trustor dies

Funding Bypass Trust Pecuniary Funding Formula

ILM 200644020 (December 15, 2005) Contra finding in PLRs 9524020, 9608036, 9623056 and

9808043

Funding Bypass Trust Pecuniary Funding Formula

ILM 200644020 (December 15, 2005) Contra finding in PLRs 9524020, 9608036, 9623056 and

9808043

Funding Bypass Trust Fractional Formula Allocation If retirement assets paid to trust to fund under-funded

Bypass Trust, require that non-retirement assets be allocated first Preserve rollover option for surviving spouse Get “better” assets (w/o income tax liability) into Bypass

Any excess retirement assets be distributed outright to surviving spouse

Funding Bypass Trust Fractional Formula Allocation If retirement assets paid to trust to fund under-funded

Bypass Trust, require that non-retirement assets be allocated first Preserve rollover option for surviving spouse Get “better” assets (w/o income tax liability) into Bypass

Any excess retirement assets be distributed outright to surviving spouse

Where’sthe

bathroom?

Any Questions?

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