Distribution

Hopefully you have been contributing and growing your retirement assets. Although the accumulation stage is not easy because of all the competing needs, the most important part is the distribution. There are a number of pitfalls and penalties if the distributions are not correctly set up and executed properly. When are the funds going to be needed?

Early withdrawals

During retirement

Spousal support

Charitable Plans

Legacy for beneficiaries

The following are summaries are a guide as to what can and cannot be done:

Early Retirement - If you are lucky enough to be able to take an early retirement before age 59.5, all withdraws are subject to income taxes and 10% penalties, unless an exception apples.

There are NO financial hardship exceptions.

10% Early Distribution Penalty Exceptions

 

Exception Plans & IRAs IRAs only Plans Only
Death X    
Disability 72 (m) (7) X    
Annuitizing 72(t) payments X    
Medical Expenses X    
IRS Levy X    
Active Reservists X    
Higher Education Expenses   X  
First Time Home Buyer   X  
Health Insurance (if unemployed)   X  
Age 55     X
Age 50 (Public Safety Employees)     X
Section 457 plans     X
Divorce (QDRO)     X

During Retirement Any normal or RMD (Required Minimum Distributions > 70.5) distributions are going to be subject to the following Income Tax Aspects:

IRA withdrawals are subject to income tax.

Exceptions:

Roth IRAs
Withdrawal of nondeductible IRA contributions
Withdrawal of after-tax funds contributed to plans

State Income Tax – some states are tax free

Special income tax breaks

NUA (Net Unrealized Appreciation)
10 Year Special Averaging
IRD (income in respect of a decedent) Deduction for beneficiaries

Tax Penalties

10% early withdrawal
50% not taking a required distribution
6% excess contribution

Who will pay the income tax on the post-death IRA distributions?

Individual beneficiary
Trust or trust beneficiary

Types of IRA (or Roth IRA) Beneficiaries:

Individual Beneficiaries:

Spouse beneficiary

Rollover (no deadline for a spousal rollover)
Remain as beneficiary (Recalculation, if > 10 yrs younger & sole benef)
Delayed post-death distributions
Spousal Consent – if a qualified plan

Non-spouse beneficiary

Stretch IRA is automatic if they want it
Non-spouse beneficiaries cannot roll over an inherited IRA into their own

Non-individual beneficiaries:

Estate (not a designated beneficiary, no life expectancy, no stretch)
Charity (not a designated beneficiary, no life expectancy, no stretch)
Trust

  • Qualifying stretch may be available (look-through or see through trust)
  • Non-qualifying (not a designated benefic., no life expectancy, no stretch)
  • Roth IRA Trust strategy 
  • QTIP Trust

Multiple beneficiaries

Separate account rules

IRA can be split before or after death

Post-death split must be done by end of year after the year of
I RA
owner’s death to maintain separate account treatment