Tax Planning for Retirees

Qualified Retirement Plans

  • § 2.01 Overview of Taxation of Participants in Qualified Retirement Plans
  • —–[1] Benefit Payments Taxable When Received
  • —–[2] Nontaxable Portion of Annuity Payments
  • —–[3] Nontaxable Portion of Non-Annuity Payments
  • —–[4] Additional Tax on Premature Distributions
  • —–[5] Requirement for Spousal Annuity
  • —–[6] Diversification of Employer Securities
  • —–[7] Distribution of Employer Securities
  • —–[8] Distributions by Stock Bonus Plans and ESOPs
  • —–[9] Transfers to an IRA or Other Plan
  • —-[10] Borrowing from the Plan
  • —-[11] Divorce Property Settlements
  • —-[12] Assignment of Benefits in the Plan
  • —-[13] Distributions of Annuity Contracts
  • —-[14] Distributions of Life Insurance Contracts
  • —-[15] Community Property Interest
  • —-[16] Civilian and Military Employees of the Federal Government
  • —-[17] Exempt Charitable Organization as a Plan Beneficiary
  • —-[18] Income Tax Withholding
  • —-[19] Retirees Born Before 1936
  • § 2.02 Categories and Classifications of Qualified Retirement Plans
  • § 2.03 Qualified Retirement Plans Receiving Special Tax Treatment
  • —–[1] Qualified Governmental Plans
  • —–[2] Qualified Church Plans
  • —–[3] Section 403(b) Plans
  • —–[4] Tier 2 Railroad Retirement Benefits
  • —–[5] Self-Employed Individuals
  • § 2.04 Date Retirement Benefits Begin under Qualified Retirement Plans
  • —–[1] Limits on Time for Payments Generally
  • —–[2] Earliest Date Retirement Benefits May Begin Without Penalty
  • ———-[a] The Additional Tax on Premature Distributions and Applicable Exceptions
  • —————[i] The Additional Tax Generally
  • —————[ii] The Age  and Death Exceptions
  • —————[iii] The Disability Exception
  • —————[iv] The Substantially Equal Payment Exception
  • ——————–[A] Substantially Equal Payments Generally
  • ——————–[B] Substantially Equal Annuity Payments
  • ——————–[C] Substantially Equal Non-Annuity Payments and Safe Harbors
  • ——————–[D] Tailoring the Source and Amount of Payments
  • ——————–[E] Potential IRS Relief for Erroneous Payments
  • ——————–[F] Modifications of Payments Triggering Penalties and Interest
  • —————[v] The Retirement Age Exception
  • —————[vi] The QDRO Payments Exception
  • —————[vii] Exception for Cost of Life Insurance
  • —————[viii] Distributions Not Exceeding Itemized Medical Deductions
  • —————[ix] Distributions to Military Reservists
  • —————[x] Other Specific Exceptions to the additional tax
  • ———-[b] Other Considerations in Applying the Additional Tax and Exceptions
  • —————[i] Plan Loans to Taxpayers or Beneficiaries
  • —————[ii] Five-Percent Owners
  • —————[iii] Rollover Funds in a Recipient Plan
  • —————[iv] Involuntary Distributions
  • —————[v] Personal or Financial Hardship
  • —————[vi] Deemed Distributions
  • —————[vii] Form 5329 and the Statute of Limitations
  • —–[3] Commencement of Distributions Under Section 401(k) and 403(b) Plans
  • —–[4] Restriction on Pension Plan Payments before Retirement
  • —–[5] Earliest Date Plans Are Required to Begin Benefit Payments
  • —–[6] Election to Commence Distributions from a Stock Bonus Plan or ESOP
  • —–[7] Latest Date Retirement Benefits May Begin
  • § 2.05 Retiree Investment in a Plan (or a Plan Program)
  • —–[1] Identification of Plan Programs
  • —–[2] Determination of Retiree Investment in a Plan Program
  • ———-[a] Formula for Determining Retiree Investment in a Plan Program
  • ———-[b] Classification of Some Specific Types of Employee Contributions
  • —————[i] Designated Employee Contributions
  • —————[ii] Contributions Made at an Employee’s Election
  • —————[iii] Contributions Allocable to a Plan Program Providing Life Insurance
  • —————[iv] Contributions Allocable to Accident and Health Benefits
  • —————[v] Payments of Principal and Interest on Nonqualified Plan Loans
  • —————[vi] Contributions of Nontaxable Income
  • —————[vii] Contributions While an Expatriate
  • —————[viii] Deductible Employee Contributions Not Included
  • —————[ix] Railroad Retirement Taxes
  • ———-[c] Return of Investment in Plan Program
  • ———-[d] Investment in a Plan or Plan Program Illustrated
  • ———-[e] Self-Employed Individual’s Investment in a Plan or Plan Program
  • § 2.06 Taxation of Plan Annuity Payments
  • —–[1] Establishing an Annuity
  • —–[2] Plan Payments Taxed as an Annuity
  • ———-[a] Characteristics of Plan Payments Taxed as  Annuity Payments
  • ———-[b] Variable Annuity Payments
  • ———-[c] Interest Payments Not Annuity Payments
  • —–[3] Taxable and Nontaxable Portions of Plan Annuity Payments
  • ———-[a] Determining  Taxable and Nontaxable Portions Generally
  • ———-[b] Annuity Payments for Life of Retiree
  • —————[i] Types of Payouts over Retiree’s Lifetime
  • —————[ii] Monthly Periodic Payments
  • —————[iii] Periodic Payments That Are Quarterly, Semiannual, Annual, Etc.
  • ———-[c] Annuity Payments for Lifetimes of Retiree and Beneficiary(s)
  • —————[i] Types of Payouts over Lifetimes of Retiree and Beneficiaries
  • —————[ii] Monthly Periodic Payments
  • —————[iii] Periodic Payments That Are Quarterly, Semiannual, Annual, Etc.
  • —————[iv] Different Annuity Amounts Paid to Retiree and Beneficiaries
  • —————[v] Two Annuities Paid Under Single Plan Program
  • ———-[d] Payments under a Fixed Term Annuity
  • ———-[e] Increases or Decreases in the Annuity Payment
  • ———-[f] Multiple Annuity Recipients or Multiple Annuities
  • ———-[g] A Plan’s Recoupment of Annuity Overpayments
  • ———-[h] Correction of Failure to Claim Full Recovery of Investment
  • —–[4] Recovered and Unrecovered Investment in a Plan Annuity
  • ———-[a] Recovered and Unrecovered Investment Generally
  • ———-[b] Fully Recovered Investment in the Annuity
  • ———-[c] Unrecovered Investment in the Annuity
  • —–[5] Taxation of Variable Annuities Provided by Plans
  • ———-[a] Variable Annuities Defined
  • ———-[b] Computed Nontaxable Amount in Excess of Actual Payments
  • ———-[c] Recovered or Unrecovered Investment in the Annuity
  • —–[6] Nontaxable Annuities for Survivors of Slain Public Safety Officers
  • § 2.07 Taxation of Non-Annuity Distributions
  • —–[1] Non-Annuity Distributions Defined
  • —–[2] Certain Non-Annuity Payments Not Taxable
  • —–[3] Partially Taxable Non-Annuity Payments
  • —–[4] Fully Taxable Non-Annuity Payments
  • —–[5] Deduction of Loss on Final Non-Annuity Distribution
  • —–[6] Phased Retirement Non-Annuity Payments
  • —–[7] Retiree Repayment of Excessive Final Distribution
  • § 2.08 Special Treatment of Distributions of Employee Contributions
  • —–[1] Potential Tax Savings
  • —–[2] Pre-1987 Employee Contributions
  • § 2.09 Plan Ownership and Distribution of Employer Securities
  • —–[1] Deferral  of Net Unrealized Appreciation in Distributed Employer Securities
  • ———-[a] Plans and Securities Subject to the Net Unrealized Appreciation (NUA) Rule
  • ———-[b] Net Unrealized Appreciation (NUA} Included in Lump Sum Distributions
  • ———-[c] NUA in Distributions That Are Not Lump Sum Distributions
  • ———-[d] Post-Distribution Sales of Employer Securities with NUA
  • ———-[e] Rollovers of Employer Securities with NUA
  • —–[2] Distributions of Employer Securities by Stock Bonus Plans and ESOPs
  • ———-[a] Distributions by Stock Bonus Plans and ESOPs Generally
  • ———-[b] Election of Five-Year Distribution of Entire Account Balance
  • ———-[c] Right to Demand Distribution of Employer Securities
  • ———-[d] Repurchase of Employer Securities Not Readily Tradable
  • —————[i] Limited Period for Exercise of the Repurchase Option (or “Put”)
  • —————[ii] Repurchase of an Installment Distribution of Employer Securities
  • —————[iii] Repurchase of a Total Distribution of Employer Securities
  • —————[iv] Rollover of Proceeds from Employer’s Repurchase of Employer Securities
  • ———-[e] Definition of Employer Securities Distributable by Stock Bonus Plans and ESOPs
  • ———-[f] Tax Planning for Lump Sum Distributions of Employer Securities
  • —————[i] Significant Factors in Tax Planning for Distributions of Employer Securities
  • —————[ii] The Potentially Optimum Result for a Lump Sum Distribution
  • —————[iii] The IRS May Attempt to Identify NUA with Specific Stock Rolled Over
  • —————[iv] Diminished Deferral for Non-Readily Tradable Stock
  • —–[3] Election to Diversify Out of Employer Securities
  • ———-[a] Election to Diversify Employer Securities Held by Defined Contribution Plans
  • ———-[b] Election to Diversify Investments Held by ESOPs
  • § 2.10 Nontaxable Transfers or Rollovers to a Different Plan or IRA
  • —–[1] Transferring Plan Funds to another Plan or IRA Generally
  • —–[2] Methods of Transferring Plan Funds to an IRA
  • —–[3] Requirements for an Indirect Rollover
  • ———-[a] Indirect Rollovers Generally
  • ———-[b] Partial Indirect Rollovers
  • ———-[c] IRS Waivers of the 60-Day Rollover Requirement
  • —————[i] Favorable IRS Letter Rulings Approving Waiver
  • ——————–[A] IRS Considerations for Approving Waiver
  • ——————–[B] Favorable IRS Letter Rulings Due to Financial Institution Errors
  • ——————–[C] Favorable IRS Letter Rulings Due to Death, Disability, or Illness
  • ——————–[D] Favorable IRS Letter Rulings Due to Distribution Check Not Cashed
  • ——————–[E] Favorable IRS Letter Rulings Due to Misleading or Nonexistent Advice
  • ——————–[F] Favorable IRS Letter Rulings Due to Mishandling of Trustee Rollovers
  • ——————–[G] Favorable IRS Letter Rulings Due to Casualty or Disaster
  • ——————–[H] Favorable IRS Letter Rulings Due to Events beyond Taxpayer’s Control
  • ——————–[I] Favorable IRS Letter Rulings Where Equity Requires Waiver
  • —————[ii] Unfavorable IRS Letter Rulings
  • ——————–[A] Unfavorable IRS Letter Rulings: Distribution Not Eligible for Rollover
  • ——————–[B] Unfavorable IRS Letter Rulings: Trustee Declines to Provide Information
  • ——————–[C] Unfavorable IRS Letter Rulings: Funds Used for Personal Expenses, etc.
  • ——————–[D] Unfavorable IRS Letter Rulings: Unconsummated Personal Use Intent
  • ——————–[E] Unfavorable IRS Letter Rulings: Initial Absence of Rollover Intent
  • ——————–[F] Unfavorable IRS Letter Rulings: Negligent Taxpayer Conduct
  • ——————–[G] Unfavorable IRS Letter Rulings: Family and Work-Related Stress
  • —————[iii] Judicial Review of Unfavorable Rulings
  • —————[iv] Extension of 60-Day Rollover Period for Frozen Accounts
  • —————[v] Self-Certification of Permissible Reasons for Violating 60-Day Requirement
  • —–[4] No Rollovers for Certain Types of Distributions
  • —–[5] Rollovers of Distributions that Include Property Other than Cash
  • —–[6] Rollovers by Surviving Spouse
  • —–[7] Rollovers by Nonspouse Beneficiaries
  • —–[8] Rollovers that Involve Retiree Investment
  • ———-[a] Direct and Indirect Rollovers of Distributed Investment
  • ———-[b] Multiple Rollovers from a Single Distribution
  • —–[9] Timing of a Transfer from a Qualified Plan to an IRA or Roth IRA
  • § 2.11 Minimum Surviving Spouse Benefits Required of Plans
  • —–[1] Planning Considerations Where Minimum Surviving Spouse Benefits Required
  • —–[2] Plans Requiring Spousal Survivor Annuities
  • ———-[a] Plans Requiring Spousal Survivor Annuities Generally
  • ———-[b] Qualified Joint and Survivor Annuity (QJSA)
  • —————[i] QJSA Defined
  • —————[ii] QJSA Requirements Regarding Value, Marriage, Etc.
  • —————[iii] When Plan Must Commence QJSA Payments
  • ——————–[A] Commencement of  QJSA Payments Generally
  • ——————–[B] Retirement At a Plan’s Normal Retirement Age
  • ——————–[C] Retirement At a Plan’s Early Retirement Age
  • ——————–[D] Separation Before Reaching Early or Normal Retirement Age
  • —————[iv] How QJSA Payments Are Taxed
  • —————[v] Recovered and Unrecovered Investment in a QJSA
  • ———-[c] Qualified Preretirement Survivor Annuity (QPSA)
  • —————[i] QPSA Defined
  • —————[ii] QPSA Requirements Regarding Payments, Marriage, Etc.
  • —————[iii] When Plan Must Commence QPSA Payments
  • —————[iv] How QPSA Payments Are Taxed
  • —–[3] Annuity Starting Date for a QJSA or QPSA
  • —–[4] Waiver of a QJSA or QPSA
  • ———-[a] Waiver Period for QJSA or QPSA
  • ———-[b] Extended Waiver Period for QJSA
  • ———-[c] Spousal Consent Required
  • ———-[d] Optional Forms of Benefit after Waiver of a QJSA
  • ———-[e] Optional Spousal Annuity in Lieu of QJSA
  • ———-[f] When Waiver Not Allowed
  • —–[5] Spousal Consent to Use Plan Benefits to Secure a Loan
  • —–[6] Consent When Spouse Unavailable or Incapacitated
  • —–[7] Exception for Profit-Sharing or Stock Bonus Plans
  • ———-[a] When Spousal Annuity Requirements Do Not Apply
  • ———-[b] Participant Waiver with Spousal Consent
  • ———-[c] Plan Mergers, Spinoffs, and Similar Transfers
  • ———-[d] Plan Distributions and Loans to the Participant
  • —–[8] Exception for Accrued Benefits in an ESOP
  • —–[9] Separate Accounts in Defined Benefit Plans
  • —–[10] Treatment of Death Benefits
  • —–[11] Payments Under Both a QJSA and a QPSA
  • —–[12] Marriage and Divorce
  • —–[13] Assignment or Transfer of Interest in a QJSA or QPSA
  • —–[14] QJSAs for Unmarried Participants
  • —–[15] Relative Values of QJSAs and Other Forms of Benefit
  • —–[16] Distribution of a QJSA or QPSA Contract
  • —–[17] Tax Planning for QJSAs and QPSAs
  • ———-[a] Tax Deferral for Participants
  • ———-[b] Tax Deferral for Surviving Spouses
  • ———-[c] Planning with the QOSA
  • ———-[d] Dealing with Refusal to Consent
  • ———-[e] Marriage and Divorce Planning
  • ———-[f] Planning for the QPSA
  • § 2.12 Plan Distributions after Divorce or Separation (QDROs)
  • —–[1] QDROs Generally
  • —–[2] Qualified Retirement Plans Other than Governmental or Church Plans
  • ———-[a] General Restrictions on QDRO Provisions
  • ———-[b] QDRO Payments at Earliest Retirement Age
  • ———-[c] Survivor Benefits for Former Spouse
  • —–[3] Qualified Governmental Plans, Qualified Church Plans, and Certain 403(b) Plans
  • —–[4] Rollovers by Divorced Spouse
  • —–[5] Payment to Spouse Under Pre-QDRO Orders
  • § 2.13 State Community Property Laws Generally Overridden
  • § 2.14 Assignment or Transfer of Interest in a Qualified Retirement Plan
  • § 2.15 Life Insurance Contracts Purchased by Qualified Retirement Plans
  • —–[1] Purchased Life Insurance Contracts Generally
  • ———-[a] Identifying Life Insurance Contracts Purchased by Qualified Plans
  • ———-[b] Satisfaction of the Incidental Benefit Rule
  • —–[2] Life Insurance Proceeds Paid Directly to Beneficiaries
  • —–[3] Life Insurance Proceeds Paid to the Plan
  • —–[4] Cost of Life Insurance Paid by a Plan
  • —–[5] Distribution of a Life Insurance Contract by a Plan
  • —–[6] Tax-Free Exchange of Distributed Life Insurance Contract for an Annuity
  • § 2.16 Annuity Contracts Distributed by Qualified Retirement Plans
  • —–[1] Distribution of Annuity Contracts Generally
  • —–[2] Continuing Status of a Distributed Nontransferable Annuity
  • ———-[a] When Distribution of Annuity Contract Remains Nontaxable
  • ———-[b] Nontaxable Rollovers Involving 401 Annuity Contracts
  • ———-[c] Alternate Conversion of a Distributing Plan to a Qualified Annuity Plan
  • ———-[d] Enhancement of an Annuity Contract on Demutualization of the Issuer
  • ———-[e] Allocating Plan Investment to Nontransferable Annuity Contracts
  • —–[3] Treatment of Distributions of Transferable Annuity Contracts
  • ———-[a] Entire Value of Transferable Annuity Included in Gross Income
  • ———-[b] Allocating Plan Investment to Transferable Annuity Contracts
  • ———-[c] Tax-Free Exchange of Transferable Annuity Contract
  • —–[4] The Effect of Multiple Qualified Plan Programs
  • § 2.17 Plan Payments of Disability or Medical Benefits or Premiums
  • § 2.18 Plan Loans to Retirees or Beneficiaries
  • —–[1] Tax Treatment of Plan Loans Generally
  • —–[2] Tax Treatment of Qualified Residential Loans
  • —–[3] Tax Treatment of Qualified 5-Year Term Loans
  • —–[4] Multiple Plan Loans and Refinancing of Plan Loans
  • —–[5] When a Plan Loan Becomes a Deemed Distribution
  • —–[6] Tax Treatment of the Repayment of Plan Loans
  • —–[7] Loan Offsets and Rollovers
  • § 2.19 Federal Government Retirement Plans for Civilian Employees
  • —–[1] Introduction to Federal Government Retirement Plans for Civilian Employees
  • —–[2] CSRS and FERS Benefits
  • ———-[a] The Alternative Annuity Option
  • ———-[b] Voluntary Contributions to CSRS or FERS
  • —–[3] TSP Distributions
  • —–[4] CSRS or FERS Disability Annuity
  • —–[5] Special FERS Death Benefit
  • —–[6] Survivors of Slain Public Safety Officers
  • § 2.20 Retirement Plans for Members of the U.S. Military
  • § 2.21 Fewer Restrictions on Church, Governmental, and Some 403(b) Plans
  • —–[1] Modification of Normal Requirements
  • —–[2] Meaning of the Term “Unrestricted Section 403(b) Plan”
  • § 2.22 Exempt Charitable Organization as a Plan Beneficiary
  • § 2.23 Tax Withholding from Plan Distributions
  • —–[1] Income Tax Withholding from Eligible Rollover Distributions
  • —–[2] Periodic Payments that Are Not Eligible Rollover Distributions
  • —–[3] Nonperiodic Payments that Are Not Eligible Rollover Distributions
  • —–[4] Certain Dividend Distributions from ESOPs
  • —–[5] Withholding of Social Security Taxes
  • § 2.24 Certain Lump Sum Distributions for Retirees Born Before 1936
  • —–[1] Special Tax Treatment of Certain Lump Sum Distributions
  • —–[2] Definition of “Lump Sum Distribution”
  • —–[3] Meaning of “Taxable Lump Sum”
  • —–[4] Effect of Rollovers on Lump Sum Treatment
  • —–[5] Income Averaging Election for Lump Sum Using Special Tax Rates
  • ———-[a] Nontransferable Annuity Contract Not Part of a Lump Sum Distribution
  • ———-[b] Lump Sum Distribution Includes Nontransferable Annuity Contract
  • ———-[c] Effect of State Community Property Laws on Income Averaging Computation
  • —–[6] Election of Special 20 Percent Tax Rate for Pre-1974 Amounts
  • ———-[a] Treatment of Pre-1974 Portion
  • ———-[b] Effect of the 20 Percent Rate Election on the Post-1973 Portion
  • —–[7] Lump Sum Distribution Received by Beneficiaries, Trusts, Etc.
  • ———-[a] Election of Special Tax Computations for Lump Sum Distribution
  • ———-[b] Lump Sum Distribution Received by Two or More Beneficiaries
  • ———-[c] Entire Lump Sum Distribution Received by Two or More Trusts
  • —–[8] Effect of QDROs on Lump Sum Treatment
  • § 2.25 Tax-Free Restorative Payments
  • § 2.26 Tax on Net Investment Income Not Applicable
  • § 2.27 Estate or Gift Tax Imposed on Plan Benefits

» Chapter 3 – ELIGIBLE EXEMPT ORGANIZATION PLANS