IRA Distributions

Taxation

When a distribution is taken from a Traditional IRA, the amount received is generally taxable as ordinary income in the year the assets are distributed.  However, there are several exceptions to this rule which are:

·   Rollovers - If eligible, the assets are distributed to the owner and then re-deposited into another IRA account within 60 calendar days of receipt.

·    Transfers- The assets are moved directly from one IRA to another IRA.

·         Removing excess contributions or rollovers -  Ineligible contributions are removed prior to tax-filing date plus extensions (earnings are subject to tax and penalties).

·         Revocation - The IRA is revoked within seven days of establishment.

·         Removal of non-deductible contribution - That portion of the distribution representing non-deductible contributions.

Distributions Prior to Age 59 ½

Premature Distribution Penalty

IRA rules are designed to discourage early distributions and a 10% penalty is imposed on distributions taken prior to the IRA owner reaching age 59 ½.  However, the law also provides several exceptions to the penalty which includes:

·  Death - Upon death, assets distributed from the IRA to beneficiaries will not be subject to the 10% penalty.

·         Disability -  Upon becoming totally disabled, according to the IRS' definition, withdrawals will be penalty free.

·         Substantially equal periodic payments (Rule 72(t)) -  The penalty is waived upon receiving a series of substantially equal periodic payments based on life expectancy that must continue for at least 5 years or until the IRA owner reaches age 59 ½, whichever is longer.  Altering these payments results in payment of the 10% penalty on all distributions.

·         A first-time home purchase - First-time home purchase expenses up to $10,000 (lifetime limit) for the IRA owner, their spouse, children, or grandchildren are not subject to the 10% penalty.  A first time homebuyer is one that had no ownership interest in a principal residence during the two-year period that ended on the date of the contract of the new primary residence.

·         Higher education expenses - Qualified higher education expenses for the IRA owner, their spouse, children, or grandchildren are penalty free. Expenses include tuition, fees, books, equipment, and room and board for students that are enrolled on at least a half time basis.

·         Health insurance - Individuals receiving unemployment compensation for 12 consecutive weeks will be allowed to take penalty free distributions from their IRA to pay for health insurance, provided they take the distribution in the year they received the unemployment compensation, or the year following.

·         Medical expenses - The waiver also applies to distributions used for unreimbursed medical expenses that exceed 7.5% of adjusted gross income.

·         Distributions for certain declared Presidential Disaster Area relief -  The 10% penalty is waived for qualified disaster area relief distributions made by individuals who suffered a loss as a result of a “major disaster.” Qualified distributions are those that are taken by qualified disaster area IRA holders during IRS specified periods and for specified maximum amounts.

·         Distributions for individuals called to active duty -  Individuals called or ordered to active military duty on or after December 31, 2007 may take penalty-free distributions from their IRAs and employer sponsored retirement plans.

Distributions Between 59 ½ & 70 ½

After reaching age 59 ½, IRA owners can take distributions for any reason from their IRA without facing a 10% penalty, however ordinary income tax is due on all contributions that were previously not taxable.

Tax Withholding

By law, Stifel, Nicolaus must withhold 10% Federal tax from each taxable distribution taken, however your client can waive the tax withholding.  

Distributions in Kind

If desired, distributions in kind may be taken from IRAs.  Transferable securities held in Stifel, Nicolaus IRA accounts can be sent out or moved into retail accounts.  Please note that securities may not always be immediately transferable, and will be valued as of the close of the market on the day they are distributed from the account

Beneficiary Designations

It is an IRA owner's exclusive right to designate whom ever they wish as their beneficiary(s).  They may name one or more individuals as beneficiaries, or may name entities, such as churches, schools, a trust, their estate, or charities.  The appointment of beneficiaries is extremely important for the following reasons:

1.      The individual and /or entity designated as the primary beneficiary will inherit the rights to any assets remaining in the IRA after the owner's death.

2.      IRA assets avoid probate and can be paid immediately to a beneficiary upon death.

NOTE:  The final beneficiary designation is technically determined as of September 30, of the year following the year of the IRA owner's death.  This allows for a beneficiary to be disregarded during this period of time by “disclaiming” their rights, or for the IRA to be separated into separate beneficiary accounts.

·        Estate as Beneficiary

When an IRA owner designates their estate as the primary beneficiary, or neglects to name a primary beneficiary, the IRA must go through probate where the personal representative proves the validity of the decedent’s will and follows its terms in the disposition of the estate’s assets.  This can be a lengthy court proceeding.  The IRA must be distributed in full with the five-year payout option (discussed in detail in the death distribution options section) if death is before the required beginning date.

·        Trust as Beneficiary

If a trust is named as the primary beneficiary, the trustee of the trust may select one of the following distribution options:

·         A single-sum distribution

·         The five-year option (discussed in detail in the death distribution options section)

·         The life expectancy option.  This option may only be selected if the trust is considered “qualified” and the beneficiary with the shortest life expectancy will be used to determine payments (see note below).

NOTE:  If the qualified trust is designed as a single trust for the benefit of multiple beneficiaries, RMDs are based upon the oldest beneficiary's age in the first year and then reduced by one year for each succeeding year.

-    Qualified Trust

In order for a trust to be considered qualified for the purpose of determining life expectancy, it must:

1.   Be valid under state law

2.   Be irrevocable upon the death of the IRA owner

3.   Have identifiable beneficiaries named

4.   Provide qualifying documentation or a copy of the trust instrument to the custodian by October 31 of the year after the year of the account holder’s death.

If the trust does not meet these qualifications, the IRA will be treated as if no beneficiary is named.

Death of the IRA Holder

Distribution Options

Death before 70 ½ 

If an IRA owner dies before his or her "Required Beginning Date" (see RMDs suspended for 2009 and Required Beginning Date, page 10), a beneficiary has several distribution options from which to choose, and these are dependent upon whether the beneficiary is a spouse or non-spouse.

·        Non-spouse Beneficiary

After the death of the IRA owner, non-spouse beneficiaries must select one of the following distribution options:

1.      Life Expectancy Payments

A beneficiary can choose to take a stream of distributions based on their own single life expectancy.  If this option is selected, the first distribution must be taken no later than December 31 of the year following the year of the IRA owner's death.  The first distribution is based upon the beneficiary’s single life expectancy factor.  This is determined by referencing their attained age for the year of distribution in the IRS single life expectancy tables.  Subsequent RMDs will be based on the original life expectancy factor reduced by one each year.

Note:  This option is not available for non-living entities such as churches, charities, or an estate.  However, the beneficiaries of qualified trusts may select this option.

2.      Five-year Rule.

If a beneficiary chooses the five-year option, the balance of the IRA must be withdrawn by December 31 of the IRA owner's fifth anniversary of death.  Note that because of the RMD suspension for 2009, the “five-year” rule is extended one year.

During this period, there are no minimum or maximum amounts that must be withdrawn each year.  This option is available to non-living entities such as churches, charities, an estate, or a non-qualified trust. 

3.      Life Expectancy Default

If a beneficiary chooses to delay immediate payouts, or does not select the five-year rule, the single life expectancy rule would apply in all cases in which the IRA owner selected a designated beneficiary.  If no beneficiary is designated the five-year rule will apply.                                                                

NOTE:  Distributions may always be accelerated, and a total distribution may be taken at any time.

·        Spouse Beneficiary

When a spouse is named as the primary beneficiary and the IRA owner dies before the required beginning date, a spouse has distribution options similar to a non-spouse beneficiary, including one additional option. These options are:

1.      Five-year rule      

The same rules apply.

2.      Life Expectancy Payments

A spouse can choose life expectancy payments and begin payments by the later of December 31 of the year following the IRA owner's death, or by December 31 of the year in which the IRA owner would have reached age 70 ½.  Life expectancy payments are considered RMDs and the first RMD is calculated based upon the spouse’s single life expectancy factor by referencing their attained age for the year of distribution.  The IRS single life expectancy table will again be referenced for each succeeding year’s distributions.

3.      Treat as Own IRA

A spouse beneficiary, and only a spouse beneficiary, may choose to treat a deceased spouse's IRA as their own.  This is accomplished by rolling or transferring the IRA into an IRA in their own name.  Once the assets are in the new IRA, any future distributions are based on the age of the surviving spouse and the new beneficiary(s) selections.

·        Required Election

If an IRA owner dies before the required beginning date, a beneficiary must indicate in writing which distribution option they are selecting, and they must make this election by December 31 of the year following the year of the IRA owner's death. 

If the election is not made, distributions will be paid to the beneficiary using a pre-determined method that's outlined in the deceased owner's IRA plan documents.

Distributions after 70 ½

Once a Traditional IRA owner reaches the age of 70 ½, annual distributions of a minimum portion of the IRA are required to begin.  And, if minimum distributions are not taken, a

50% penalty is assessed on the required amount not distributed. With such a severe penalty, it's important to understand the rules of Required Minimum Distributions (RMDs). 

RMDs suspended for 2009

In December 2008, the Worker, Retiree, and Employer Recovery Act of 2008 was signed into law, which includes a provision that suspends the 50% penalty for failing to take RMDs for 2009.  This one-year suspension includes RMDs from IRAs and employer-sponsored defined contribution plans for account owners and beneficiaries.  Note that 2008 RMDs were not affected and should have been withdrawn from the IRA or plan.

Required Beginning Date

RMDs must begin in the year the IRA holder turns 70 ½.  However, because of the 2009 RMD suspension, those turning 70 ½ in 2009 will be allowed to skip their 2009 RMD completely and take their first RMD by December 31, 2010 (no delay to April 1, 2011 allowed for this distribution).  

Determining the RMD Amount

There is a formula that must be used to calculate the RMD each year and it involves two key facts.  First, determine the previous year's December 31 aggregate value of all IRA accounts.  Secondly, determine the life expectancy factor of the IRA holder from the IRS Longevity Tables. Once these two facts are determined, simply divide the previous year's aggregated balance by the current life expectancy factor. 

·        More than one IRA

If the IRA owner has multiple IRAs, the aggregated required amount may be taken from one IRA or spread between the IRAs as selected by the owner.

          RMD Elections

In April, 2002, the Government issued final regulations that simplified the RMD structure.  The Uniform Lifetime Table was created to be used by all IRA owners to determine life expectancy factors, regardless of who is appointed as the beneficiary of the IRA.  In addition, this same table is to be used for those not wishing to appoint a beneficiary, or electing their estate as the primary beneficiary.  The one exception to this rule is when an IRA owner appoints as their sole beneficiary, their spouse who is more than 10 years younger than the IRA owner.  In this case, the actual ages of the owner and the spouse will be used to determine the RMD factor. 

·        RMDs recalculated each year

Under the finalized RMD regulations, IRA owners simply reference the Uniform Lifetime Table, find the age they will be as of December 31 of that year and use the factor that corresponds to their age as that year's divisor.  For example, as you can see below, the factor of 27.4 would be used to calculate an individual's first RMD at 70 ½.  For each subsequent RMD, IRA owners will recalculate their RMDs by referencing the table and using the factor that corresponds to their changed age.   Note that the table assumes the age of the IRA owner and a beneficiary 10 years younger

·        Multiple beneficiaries and Non-spouse beneficiaries

Multiple primary beneficiaries or non-spouse beneficiaries are not an issue as the Uniform Lifetime Table will be used by most IRA owners, except for the one spouse beneficiary exception previously discussed.

The Uniform Lifetime Table

Age of Client	Distribution Factor	Age of Client	Distribution Factor
70	27.4	93	9.6
71	26.5	94	9.1
72	25.6	95	8.6
73	24.7	96	8.1
74	23.8	97	7.6
75	22.9	98	7.1
76	22.0	99	6.7
77	21.2	100	6.3
78	20.3	101	5.9
79	19.5	102	5.5
80	18.7	103	5.2
81	17.9	104	4.9
82	17.1	105	4.5
83	16.3	106	4.2
84	15.5	107	3.9
85	14.8	108	3.7
86	14.1	109	3.4
87	13.4	110	3.1
88	12.7	111	2.9
89	12.0	112	2.6
90	11.4	113	2.4
91	10.8	114	2.1
92	10.2	115 and older	1.9

·        The Stretch IRA – a strategy not a product

The term “Stretch IRA” has been increasingly used, and it does not refer to a type of IRA, but to a strategy to stretch payments over the life expectancy of the beneficiary.   To stretch payments over the longest period of time, naming children or grandchildren as beneficiaries is most beneficial. 

Under the finalized distribution rules, all IRA's are, in effect, stretch IRAs.  Upon the IRA owner's death, distributions will generally be paid over a beneficiary's life expectancy unless a non-living entity, such as a church, charity, estate, or a non-qualified trust is the primary beneficiary.

Death after 70 ½ 

Note that because of the 2009 RMD suspension, the following information is for RMDs for the year 2010 and beyond.

If an IRA owner dies on or after the Required Beginning Date, distribution options are reduced to the following:

·        Non-spouse beneficiary

A non-spouse beneficiary has two options: 

1.  Continue life expectancy payments.

In the year of the IRA owner’s death, the RMD is based on the decedent’s life    expectancy.  For succeeding years, RMDs will be based on the longer of the life expectancy of the designated beneficiary, as established on September 30 of the year following the IRA owner’s death, or the deceased IRA owner’s life expectancy.  In either case, the original life expectancy factor will be reduced by one for each subsequent year’s RMD.

2. Accelerate payments

Note: The five-year option is no longer available when the IRA holder dies after the   Required Beginning Date.

·        Spouse beneficiary

A spouse has three options:

1.      Continue life expectancy payments 

In the year of the IRA owner’s death, the RMD is based on the decedent’s life expectancy.  For succeeding years, RMDs are based on the longer of the life expectancy of the spouse beneficiary or the deceased IRA owner’s life expectancy.  If the decedent’s life expectancy is used, the original factor will be reduced by one for each subsequent year’s RMD.  If the spouse’s life expectancy is used, the life expectancy factor will be determined by consulting the IRS Single Life Expectancy Table for each year’s distribution.

2.      Accelerate payments

3.      Roll or transfer the deceased spouse’s IRA into their own IRA.

If a spouse beneficiary chooses to roll or transfer, they must first take the current year's RMD (as if death hadn't occurred) and then they may roll or transfer the balance.  Once the balance is rolled or transferred, distributions will be based on the age of the new IRA holder.  If the surviving spouse has not yet reached their RMD beginning date, RMDs may be discontinued until that time.

·        Multiple Beneficiaries

If multiple beneficiaries are named, the age of the oldest beneficiary will be used to determine RMDs for all beneficiaries.  However, if the IRA assets are placed into separate beneficiary IRAs by December 31 of the year following the owner's death, then each beneficiary's own life expectancy can be used to determine the remaining RMDs for that beneficiary.

·        Multiple Beneficiaries Including an Entity.

If a non living entity, such as a charity, and living beneficiaries are named, and the IRA is divided into separate beneficiary accounts before December 31 of the year following the IRA holder's death, individual payout options may be considered. 

1)      The entity may accelerate the rate of payment or take payments over the remaining single life expectancy of the IRA owner established in the year of death less one year for each subsequent RMD.

2)  Each living beneficiary may choose an accelerated rate of payment or continue 

RMDs based on each of their own life expectancy.  For subsequent distributions, each individual beneficiary’s original life expectancy factor will be reduced by one year.

Note: If the deceased IRA holder’s account has not been divided into separate beneficiary accounts by December 31 of the year following the year of death, and the entity has not received it’s full share, the remaining RMDs will be based on the deceased IRA holder’s single life expectancy, less one year for each year passed since the IRA holder’s death. 

·        RMDs with "Estate" as Beneficiary

After the IRA owner has begun RMDs based on the uniform table and dies, the estate beneficiary has two options.

1)      Take the remaining payments over the remaining single life expectancy of the IRA owner established in the year of death less one year for each subsequent RMD.                 

2)      Accelerate the payments. 

·        RMDs with Trust as Beneficiary

If a trust is considered a “qualified trust” (previously defined), after the owner's death, distributions will be determined based on the age of the oldest beneficiary listed in the trust.  After the initial payment, the established life expectancy factor will be reduced by one year for each succeeding year.

·        Non-qualified Trust

If the trust is not considered "qualified", the IRA will be deemed as having no designated beneficiary and the distributions follow "estate" guidelines listed above.                                        

·        No Designated Beneficiary

If an IRA owner neglects to name a beneficiary, the distributions will follow the "estate" guidelines listed above.

·        Distribution Reference Table

Note that RMDs for 2009 were suspended so the following chart can be used to determine RMDs for the year 2010 and beyond. It takes into consideration death before and after the IRA owner reaches their Required Beginning Date (RBD).  Note that in “Death After RBD”, a RMD must be taken in the year of IRA holder’s death based on the decedent’s life expectancy factor from the Uniform Lifetime Table.

Beneficiary	Death Before RBD	Death After RBD
Spouse	·         Total distribution ·         Five-year rule ·         Life expectancy (LE) payments based on own LE beginning in the year following the year the IRA owner would have turned 70 ½, recalculated each year ·         Rollover into their own IRA	·         Total distribution ·         First distribute RMD for year of the IRA holder’s death based on decedent’s LE ·         Continue RMDs based on the longer of the deceased IRA holder’s LE (reduced by one each year) or their own LE (recalculated) ·         Rollover the remaining assets into the spouse's IRA
Non – Spouse             Multiple Beneficiaries             Subsequent payments	·         Total distribution ·         Five-year rule ·         LE payments based on single LE of beneficiary       ·         LE payments based on the oldest beneficiary’s LE.  If the IRA is separated into individual beneficiary IRAs by 12/31 of the year following the year of the IRA owner's death, each beneficiary may use their own LE ·         LE factor is reduced by one for each subsequent year	·         Total distribution ·         First distribute RMD for year of the IRA holder’s death based on the decedent’s LE ·         Continue RMDs based on the longer of the deceased IRA holder’s LE or the LE of the beneficiary   ·         LE payments based on the oldest beneficiary’s LE.  If the IRA is separated into individual beneficiary IRAs by 12/31 of the year following the year of the IRA owner’s death, each beneficiary may use their own LE       ·         LE factor is reduced by one for each subsequent year
Qualified Trust	·         Total distribution ·         Five-year rule ·         Life expectancy payments based on the oldest beneficiary of the trust ·         For subsequent years, this factor is reduced by one	·         Total distribution ·         After RMD in year of the IRA holder’s death, subsequent RMDs will be based on the LE of the oldest beneficiary of the trust.  LE factor is reduced by one for each subsequent year
Non-qualified Trust	·         Total distribution ·         Five-year rule ·         LE payments not available	·         Total distribution ·         RMDs to continue based on the deceased IRA holder’s LE as determined in the year of death.  LE factor is reduced by one for each subsequent year
No Beneficiary Designation	·         Total distribution ·         Five-year rule ·         LE payments not available	·         Total distribution ·         RMDs to continue based on the deceased IRA holder’s LE as determined in the year of death.  LE factor is reduced by one for each subsequent year
Charity	·         Total distribution ·         Five Year Rule ·         LE payments not available	·         Total distribution ·         RMDs to continue based on the deceased IRA holder’s LE as determined in the year of death.  LE factor is reduced by one for each subsequent year
Estate	·         Total distribution ·         Five Year Rule ·         LE payments not available	·         Total distribution ·         RMDs to continue based on the deceased IRA holder’s LE as determined in the year of death. LE factor is reduced by one for each subsequent year

Roth IRA Distribution

Roth IRAs first appeared in 1998, as a retirement savings alternative to Traditional IRAs that offered "tax-free" distributions if certain distribution requirements were met.

Distribution Ordering Rules

With distributions from Roth IRAs, taxes or penalties are generally based on the type of contributions that were originally made into the Roth, and the length of time the contributions remained in the account.  Individuals can make annual non-deductible contributions into Roths, and in addition, Traditional IRA assets can be converted into Roth IRAs.  Many individuals have done both.

"Ordering rules" state that distributions must be made in the following order from the Roth:

1)      Annual contributions are distributed first

2)      Converted assets

3)  Earnings

If an individual has separate contributory and conversion Roth accounts, annual contributions will be deemed distributed first, no matter which Roth account the assets are paid from.  Once annual contributory contributions are depleted, converted assets will then be distributed followed by earnings. 

The ordering rules apply whether the distribution is considered to be qualified or nonqualified, and the Roth IRA owner will likely be responsible for the determination of what each distribution represents.

Qualified Distributions

“Qualified” distributions may be taken tax-free from Roth IRAs, and in order to be considered qualified, the following requirements must be met.  First, the assets must remain in the Roth for at least five taxable years (starting with the first taxable year a contribution was made), and one of the following events must occur:

·         attainment of age 59 ½

·         death

·         total disability or

·         first time home purchase expenses

Nonqualified Distributions

Individuals can take distributions any time from their Roth IRAs, and if distributions do not meet the above requirements, they are considered "nonqualified" (ordering rules apply).

·        Nondeductible Contributions

Annual contributions made to Roth IRAs are always nondeductible contributions and can be withdrawn tax and penalty-free, regardless of whether the distribution is considered qualified or nonqualified.

·        Nonqualified Conversion Assets

Taxes are paid in the year of conversion, and therefore no tax will be due on nonqualified distributions of conversions.  However, the 10% penalty will apply if the distribution is taken within five taxable years of the conversion and the owner is under 59 ½ years of age and does not qualify for a penalty exception.

·        Earnings Distributed

For nonqualified Roth distributions, all earnings distributed will be subject to tax and the 10% penalty unless a penalty exception applies.

·        Penalty Exceptions

Like Traditional IRAs, there are exceptions to the early withdrawal penalty, which include

-          attainment of age 59 ½

-          death

-          total disability

-          substantially equal periodic payments

-          education expenses

-          first time home purchase expenses

-          health insurance and

-          medical expenses

Required Minimum Distributions

One big difference between Traditional and Roth IRAs is that in Roth IRAs there are no required minimum distribution rules.   Roth IRA owners are not forced to take distributions when they reach 70 ½.  Assets may remain in the owner's Roth IRA until death occurs. At that time beneficiary options will prevail.

Distributions Upon Death

Since there are no RMDs associated with Roth IRAs, the options available to beneficiaries are similar to the "death prior to the required beginning date" options available in Traditional IRAs with slight variations depending on the IRA document.  Note that because of the 2009 RMD suspension, the following information is for RMDs for the year 2010 and beyond.

Generally, the following options are available:

·        Life Expectancy Payments

A non-spouse beneficiary may take life expectancy distributions, and must begin them by December 31 in the year following the year of the IRA owner's death.  However, a spouse may start distributions by the later of December 31 of the year following the year of death or the year the deceased spouse would have attained age 70 ½.

·        The Five-year Rule

A beneficiary may delay immediate payouts, but deplete the IRA by December 31^st of the year in which the fifth anniversary of the owner's death occurs.

·        Treat As Own.

A spouse beneficiary, and only a spouse beneficiary, has the option to treat the deceased spouse's Roth IRA as his or her own.

          Beneficiary Tax and Penalty Issues

When a beneficiary receives assets from a deceased owner's Roth IRA, only the earnings may be subject to taxation (the 10% penalty will not apply).  Original contributions were after-tax contributions and are tax and penalty free upon distribution.   For converted amounts from Traditional IRAs, any tax due is paid by the Roth IRA owner in the year of the distribution.

Professional tax guidance should be considered when making decisions on Roth IRA distributions.

Out 401k Rollover Planning Kit has additional information on taking distributions from IRAs. To order a 401k Planning Kit Click Here

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