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IRA Distributions

IRA Distributions. Judith A. Dorian FIRMA Annual Conference April 7, 2008. Agenda. Age Related distribution Issues Allowable and Mandatory Age-Related Distributions Exceptions to Early Withdrawal Penalty Minimum Required Distributions - traditional IRAs Distributions After owner’s Death

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IRA Distributions

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  1. IRA Distributions Judith A. Dorian FIRMA Annual Conference April 7, 2008

  2. Agenda • Age Related distribution Issues • Allowable and Mandatory Age-Related Distributions • Exceptions to Early Withdrawal Penalty • Minimum Required Distributions - traditional IRAs • Distributions After owner’s Death • Penalties • Roth Distribution Issues

  3. Permitted IRA Withdrawals • Anytime, subject to 10% early withdrawal penalty • Over-contributions, without penalty before tax filing deadline - including extensions • Income or interest subject to tax if not subject to Exception Rule • Equal amounts during owner’s lifetime

  4. Early Distribution Penalty • 10% Tax on amounts withdrawn from IRA prior to owner reaching 59 1/2 years of age • 10% Tax imposed in addition to ordinary income except in cases where exception applies

  5. Penalty Exceptions • 10% Penalty not applicable when distribution is for: • Unreimbursed medical expenses more than 7.5% of AGI • Distribution is not more than cost of medical insurance • Disability • Payment to the beneficiary of a deceased IRA owner

  6. Penalty Exceptions • Distributions received in form of annuity • Distributions are not more than cost of qualified higher education expenses • Distributions used to buy, build or rebuild 1st home • $10,000 cap, $20,000 if married • Distribution due to IRS levy of qualified plan • Distribution is qualified reservist distribution

  7. Required Minimum Distributions • First withdrawal must be taken for year in which IRA owner attains age 70 1/2 • Can be taken in that calendar year or no later than April 1 of following year • If taken at later date, 2 distributions required in that year

  8. Required Minimum Distributions • May be taken in installments • If IRA owner has multiple IRAs, all must be aggregated to calculate RMD amount, but distribution may be taken from only one, or some of the accounts • Traditional IRA distributions are normally taxable at ordinary income rates

  9. Qualified Charitable Distributions • Non Taxable distribution made directly by IRA Trustee to an organization eligible to receive tax deductible contributions • IRA owner must be at least 70 1/2 when distribution is made

  10. Qualified Charitable Distributions • Acknowledgement from charity required • Same as for deductible charitable contribution • Maximum amount of $100,000, but cannot be more than amount of distribution that would have been includable in income • Distribution will count toward RMD

  11. RMD Amount • Calculation Tables • Table I - Single Life Expectancy • Beneficiaries • Table II - Joint Life and Last Survivor Expectancy • Spouse more than 10 years younger • Table III - Uniform Lifetime • Most distributions • No Table • Designated beneficiary is not an individual and owner died before RBD, entire account must be paid out by end of 5th year following owner’s death

  12. IRA Owner Deceased • Surviving Spouse - Sole Beneficiary • May elect to be treated as owner and not beneficiary. In this case, RMD is determined as if owner in year they elected or were deemed to be the owner • Can take deceased spouse’s RMD in year spouse died, if ownership acquired that year (If RMD required)

  13. Multiple Individual Beneficiaries • Beneficiary with shortest life expectancy will be designated beneficiary if: • All beneficiaries are individuals and • The account has not been divided into separate accounts or shares for each beneficiary

  14. Trust as Beneficiary • Trust cannot be designated beneficiary, even if it is a named beneficiary • Beneficiaries of a trust will be treated as beneficiaries if all of the following conditions are met:

  15. Conditions • Valid trust under state law • Irrevocable trust, or will become so upon death of owner • Common beneficiaries of trust and IRA are identifiable from the trust instrument

  16. Conditions • IRA trustee, custodian or issuer is provided a copy of the trust instrument and it is agreed that within a reasonable time, copies of any amendments to the document will be provided to the administrator • Or the administrator must receive all of the following:

  17. Conditions • A list of all the trust beneficiaries • Certification that the list is complete, and the requirements of the first 3 conditions are met • An agreement to provide corrected certification upon adoption of any trust amendments that impact the IRA beneficiaries • An agreement to provide a copy of the trust instrument to the IRA trustee, custodian or issuer upon demand

  18. Trust as Beneficiary • Deadline for providing beneficiary documentation to IRA trustee, custodian or issuer is October 31 of year following year of the owner’s death • Separate account rules cannot be used by the beneficiaries of a trust

  19. Taxability • Traditional IRA Distributions • Fully taxable when received if only deductible contributions made • Partially taxable if non-deductible contributions made • Amt of non-deductible contributions is not taxable

  20. Recognizing Losses • Only possible when all amounts in traditional IRA have been distributed and total distributions are less than unrecovered basis • Misc. itemized deduction • Subject to 2% of AGI limit • Schedule A, Form 1040

  21. Reporting and Withholding • Distributions reported on Form 1099-R • Codes indicate reason for distribution • Withholding • Taken unless no withholding specifically requested • Periodic payments based on marital status and # allowances • Amount on non-periodic distributions usually 10%

  22. Roth IRA Distributions • Qualified distributions not includable in gross income • Qualified Distributions : • After 5-years after 1st taxable year after contribution was made and

  23. Roth IRA Distributions • Distribution is: • Made on or after attaining 59 1/2 • Made due to disability • Made to a beneficiary or estate after death • Meets first home exception as in traditional IRA rules

  24. Roth IRA Distributions • Early distribution 10% additional penalty applies when: • Violation of 5-year rule when conversion contribution is involved • Payable in year of distribution

  25. Exceptions to Penalty • Same as traditional IRA rules

  26. Roth IRA Distributions • Distributions are never required by owner at any age if the owner is alive • Minimum distribution rules apply after death • same as traditional IRAs • as though owner died before required beginning date.

  27. Distribution to Beneficiary • 5 Year Rule applies unless paid over life expectancy of designated beneficiary • If spouse is beneficiary: • Delay distribution until decedent would have reached 70 1/2 • Can treat IRA as their own

  28. Non Qualified Distributions • Includable in beneficiaries gross income • Same treatment as would have applied to owner • Conditions: • Owner died within 5 year period after 1st contribution • Owner died within 5 years of conversion from traditional IRA

  29. Tax on Excess Accumulations • 50% Excise tax applicable • Distributions less than minimum required amount for year from Roth IRAs • Same as traditional IRA rule

  30. IRA Distributions • Questions?

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