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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 Education American Academy of Estate Planning Attorneys. Overview of Retirement Assets. What are Retirement Assets? - PowerPoint PPT Presentation
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Magical Mystery Tour: An Introduction to IRA and Retirement Plan Basics
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
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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)
Overview of Retirement Assets
Overview of Retirement Assets
Options for Distributions from Qualified Plans Joint and Survivor Annuity Single Life Annuity Period Certain Annuity Lump Sum
Options for Distributions from Qualified Plans Joint and Survivor Annuity Single Life Annuity Period Certain Annuity Lump Sum
Overview of Retirement Assets
Overview of Retirement Assets
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)
Overview of Retirement Assets
Overview of Retirement Assets
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)
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
Relief from 50% Penalty “Reasonable Cause”
Relief from 50% Penalty “Reasonable Cause”
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Distributions at DeathDistributions 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
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
Distributions at DeathDistributions 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
Distributions at DeathDistributions 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
Distributions at DeathDistributions 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
Distributions at DeathDistributions at Death
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
Distributions at DeathDistributions at 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.
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.
Overview of Retirement Assets
Overview of Retirement Assets
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
Overview of Retirement Assets
Overview of Retirement Assets
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
Distributions at DeathDistributions at Death
No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust
No Designated Beneficiary Named? No beneficiary designated by participant Estate Charity Non-Qualified Trust
Distributions at DeathDistributions at Death
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
Distributions at DeathDistributions at Death
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
Distributions at DeathDistributions at Death
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
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Funding Bypass Using Spousal GPOA – PLR 200101021Funding Bypass Using Spousal GPOA – PLR 200101021
H IRA$1 million
Living Trust$3 million
Bypass Trust
$2 million
Survivor’sTrust
$1 million
W Rollover$1 million
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
Funding Bypass Using Aggregate Community Property AgreementFunding Bypass Using Aggregate Community Property Agreement
H IRA$1 million
Living Trust$3 million
Bypass Trust
$2 million
Survivor’sTrust
$1 million
W Rollover$1 million
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary 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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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
Qualified DesignatedBeneficiary Trust
Qualified DesignatedBeneficiary Trust
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?
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