Tax Planning for Retirees

Retirement Tax Planning Summary

  • § 1.00 Introduction
  • —–[1] Summary of Tax Planning Ideas and Techniques
  • —–[2] The Key Role of Qualified Retirement Plans
  • —–[3] Tax-Favored Plans for Government Employees
  • —–[4] Tax-Favored Plans for Employees of Tax-Exempt Organizations
  • —–[5] Nonqualified Employer Retirement Plans
  • —–[6] Individual Retirement Arrangements (IRAs and Roth IRAs)
  • —–[7] Designated Roth Accounts
  • —–[8] Retiring Partners and Sole Proprietors
  • —–[9] The Role of Personally Purchased Annuities
  • § 1.01 Initial Tax Planning for Retirement
  • —–[1] Initial Considerations for Retirement Tax Planning
  • —–[2] Payment Options Under Employer Retirement Plans
  • ———-[a] Payment Options in General
  • ———-[b] Non-tax Considerations Affecting Choice of Payment Option
  • ———-[c] Taxation of an Annuity Payable over One or More Lifetimes
  • ———-[d] Taxation of Required Spousal Annuities
  • ———-[e] Taxation of Distributed Annuity or Life Insurance Contracts
  • ———-[f] Taxation of a Lump Sum Distribution of the Entire Amount of Benefits
  • ———-[g] Taxation of a Lump Sum Distribution of a Portion of Total Benefits
  • ———-[h] Distribution of Employer Securities
  • —————[i] Distribution of Employer Securities Containing Net Unrealized Appreciation
  • —————[ii] Distributions from Stock Bonus Plans and ESOPs
  • ———-[i] When Payments Begin Under Employer Retirement Plans
  • —————[i] When Qualified Plans Must Begin Payments
  • —————[ii] When Payments May Begin Under Section 401(k) and 403(b) Plans
  • —————[iii] When Payments May Commence Under Employer Pension Plans
  • —————[iv] When Payments May Commence Under 457 Government Plans
  • —————[v] Earliest Date Retirement Payments May Begin Without Penalty
  • —————[vi] Latest Date Retirement Payments Begin Under Tax-Favored Employer Plans
  • ———-[j] Payment Elections Under Eligible Exempt Organization Plans
  • ———-[k] Planning Payments Under Unfunded Nonqualified Plans
  • —————[i] Elections Changing the Time and Form of Payment of Deferred Compensation
  • —————[ii] Special Treatment for Plans of States and Tax-Exempt Organizations
  • —————[iii] Short-Term Deferrals Not Subject to Usual Rules for Deferred Compensation
  • ———-[l] Lump Sum Payment Election by Government Employees Under FERS and CSRS
  • ———-[m] Lump Sum Election by Members of the U.S. Military Under the BRS
  • ———-[n] Qualified Retirement Plan Annuity Earned Substantially Outside U.S
  • ———-[o] U.S. Government Benefits Payable to Foreign Persons
  • —–[3] Transfers from Employer Retirement Plans to IRAs
  • ———-[a] Transfers from Employer Retirement Plans to IRAs Generally
  • ———-[b] Employer Plans Qualifying for Tax-Free Transfers to IRAs
  • ———-[c] Tax-Free Trustee-to-Trustee Transfers from a Plan to an IRA
  • ———-[d] Tax-Free Indirect Rollovers from a Plan to an IRA
  • ———-[e] Retention or Transfer of Investment in the Plan
  • ———-[f] Retention or Transfer of Employer Securities
  • ———-[g] Timing of Transfers from a Qualified Plan to an IRA
  • ———-[h] Transfers from Retirement Plans to IRAs by Surviving Spouse
  • —–[4] Rollovers from One Retirement Plan to Another Retirement Plan
  • —–[5] IRA Rollovers to Qualified Retirement Plans
  • —–[6] Avoiding the Penalty on Certain Early Distributions
  • ———-[a] The Penalty Tax and Exceptions
  • ———-[b] Avoiding the Penalty Using Substantially Equal Periodic Payments
  • —————[i] The Substantially Equal Payment Exception Generally
  • —————[ii] Substantially Equal Exception Safe Harbors
  • —————[iii] Tailoring the Source and Amount of Substantially Equal Payments
  • ———-[c] Avoiding the Penalty by Purchasing a Single-Premium Immediate Annuity
  • ———-[d] IRA Funds Transferred to an Employer Plan to Avoid the Penalty
  • ———-[e] Roth IRA Conversion While Receiving Substantially Equal Periodic Payments
  • ———-[f] Retention or Transfer of Investment in the Plan
  • ———-[g] Young Surviving Spouse
  • ———-[h] Form 5329 and the Statute of Limitations
  • ———-[i] Early Retirement of a Police Officer, Firefighter, or Emergency Medical Worker
  • —–[7] Employee Stock Options and Other Stock Rights
  • ———-[a] Dealing with Statutory Employee Stock Options and Stock Received
  • —————[i] Favorable Tax Treatment of Statutory Employee Stock Options
  • —————[ii] Meeting Statutory Stock Option Conditions
  • —————[iii] Favorable Treatment of Statutory Stock Options After Retiree’s Death
  • —————[iv] Paying the ISO Exercise Price with Previously-Acquired Employer Stock
  • —————[v] Unfavorable Alternative Minimum Tax (AMT) Treatment of ISOs
  • —————[vi] Elimination of Payroll Taxes on ISO Cancellations from M&A Transactions
  • ———-[b] Dealing with Nonstatutory Stock Options and Stock Received
  • —————[i] Tax Treatment of Nonstatutory Stock Options
  • —————[ii] Paying the Option Price with Previously-Acquired Employer Stock
  • —————[iii] Treatment of Forfeitures of Nonstatutory Stock
  • —————[iv] Gifts of Unvested Nonstatutory Stock
  • —————[v] Transfers of Nonstatutory Options or Stock Incident to Divorce
  • —————[vi] Death of Retiree Before Vesting of Nonstatutory Stock
  • ———-[c] Dealing with Employee Stock Rights
  • ———-[d] Qualified Equity Grants
  • —–[8] Golden Parachute Payments
  • —–[9] Qualified Small Business Stock (QSB Stock)
  • —–[10] Retirement of Partners and Sole Proprietors
  • ———-[a] Partners and Proprietors as “Self-Employed Individuals” Under Retirement Plans
  • ———-[b] Special Section 736 Provisions for Retiring Partners
  • —–[11] Tax Treatment of Same-Sex Marriages
  • § 1.02 Tax Planning During Retirement Years
  • —–[1] Funds in Tax-Favored Plans Contributed to Roth IRAs or Roth Accounts
  • ———-[a] Taxable Qualified Rollover Contributions (Roth Conversions)
  • ———-[b] Long-term Tax Savings Due to Tax Rate Differential
  • ———-[c] Long-term Tax Savings Due to Transfer of High Income Assets
  • ———-[d] Transfers to Roth IRAs When Funds Not Needed in Retirement
  • ———-[e] Retention of Funds in Both Traditional IRAs and Roth IRAs
  • ———-[f] Potential Collateral Benefits of Roth Conversions
  • ———-[g] Limitations on Roth Conversions
  • ———-[h] Trustee-to-Trustee Roth Conversions
  • ———-[i] Indirect Roth Conversions from a Tax-Favored Plan to a Roth IRA
  • ———-[j] Choice of Qualified Plan or IRA for Making a Roth Conversion
  • —————[i] Different Roth Conversion Tax Computations for IRAs and Qualified Plans
  • —————[ii] Varying the Source and Timing of Roth Conversions
  • —————[iii] Multiple Rollovers from a Single Distribution by a Qualified Plan
  • ———-[k] Roth Conversion While  Receiving Substantially Equal Periodic Payments
  • ———-[l] Recharacterizations of Roth Conversions Made Before the Year 2018
  • —————[i] Desirability, Qualification, and Effect of a Recharacterization
  • —————[ii] Limited Time for Completion of a Recharacterization
  • ———-[m] Roth Conversions by Surviving Spouses
  • ———-[n] Arrangements That May Shift Value to a Roth IRA from Related Entities
  • ———-[o] Roth Conversions to Designated Roth accounts
  • —————[i] Roth Conversions to Designated Roth Accounts Generally
  • —————[ii] Multiple Rollovers that Include a Roth Conversion to a Roth Account
  • —–[2] Nontaxable Rollovers from Designated Roth Accounts
  • ———-[a] Designated Roth Accounts Within Cash or Deferred Arrangements
  • ———-[b] Rollovers from Designated Roth Accounts to Other Roth Accounts
  • ———-[c] Rollovers from Designated Roth Accounts to Roth IRAs
  • ———-[d] Choice of Rollover to another Designated Roth Account or to a Roth IRA
  • ———-[e] Multiple Rollovers from a Single Designated Roth Account Distribution
  • —–[3] Planning for Required Minimum Distributions
  • ———-[a] Required Minimum Distribution Rules Generally
  • ———-[b] Choice of Annuity or Non-Annuity Minimum Distributions
  • ———-[c] Planning Non-Annuity Distributions for the First Minimum Distribution Year
  • ———-[d] Planning Non-Annuity Distributions for Married Individuals
  • ———-[e] IRAs and Plans Making both Annuity and Non-Annuity Minimum Distributions
  • ———-[f] Form 5329 and the Statute of Limitations
  • —–[4] Tax Planning for Required Spousal Annuities
  • ———-[a] Two Types of Spousal Annuities: QJSAs and QPSAs
  • ———-[b] Tax Deferral for Participants
  • ———-[c] Tax Deferral for Surviving Spouses
  • ———-[d] Dealing with Refusal to Consent
  • ———-[e] Marriage and Divorce Planning
  • —–[5] Temporary Personal Use of Rolled-Over Funds
  • —–[6] Planning for Qualified Loans
  • ———-[a] Qualified Plan Loans in General
  • ———-[b] Refinancing to Cure a Default on a Five-Year Qualified Plan Loan
  • ———-[c] Rollovers of Plan Offsets for Qualified Loans
  • —–[7] The Nontaxable Portion of Social Security Benefits
  • ———-[a] Lowering Taxes on Social Security Benefits Generally
  • ———-[b] Lump Sum Payment of Prior Year Social Security Benefits
  • —–[8] The Nontaxable Portion of U.S. Military Disability Pay
  • —–[9] Plan Insurance Premium Payments for Retired Police, Firefighters, etc.
  • —-[10] Chronic Illness Costs and Insurance
  • ———-[a] Deductions for Long-Term Care Services
  • ———-[b] Long-Term Care Insurance
  • ———-[c] Fees Paid to Continuing Care Retirement Communities
  • —-[11] IRA Distributions Paid Directly to Charities
  • —-[12] Payments for Long-Term Disability
  • ———-[a] Sourced Disability Payments
  • —————[i] Taxable in Proportion to Employer Contributions
  • —————[ii] Conversions to Retirement Benefits
  • —————[iii] Corrections of Employer Errors or Methodology
  • ———-[b] Wholly Exempt Disability Benefits
  • —————[i] Types of Exempt Disability Benefits
  • —————[ii] Workers’ Compensation
  • —————[iii] Tort Judgments or Settlements for Disability
  • —————[iv] Structured Settlements
  • —————[v] Interest, Medical Expenses, and Attorneys Fees
  • —————[vi] Power of Attorney Effective Upon Disability
  • —-[13] Reverse Mortgages: Drawing Retirement Funds from Home Equity
  • —-[14] Tax Treatment of the Sale of a Retiree’s Residence
  • —-[15] Minimizing the Medicare Tax on Net Investment Incomee
  • —-[16] Tax-Free Restorative Payments
  • —-[17] IRA Contributions by Retirees Working Part-Time
  • § 1.03 Beneficiary Tax Planning
  • —–[1] Beneficiary Tax Deferral Planning Generally
  • —–[2] Non-Annuity Distributions to Beneficiaries
  • ———-[a] Non-Annuity Distributions Generally
  • ———-[b] Non-Annuity Distributions for Different Classes of Beneficiaries
  • ———-[c] Non-Annuity Distributions to Eligible Designated Beneficiaries (EDBs)
  • ———-[d] Distributions to EDBs under the Ten-Year Rule
  • ———-[e] Distributions to EDBs under the Life-Expectancy Rule
  • ———-[f] When Spouse Is the Sole Beneficiary (Sole EDB)
  • —————[i] Spouse’s Choice of Distribution Method
  • —————[ii] Death in Calendar Year Before Attaining Age 62
  • —————[iii] Death in Calendar Year Attaining Age 62 or Subsequent Years
  • —————[iv] Distribution Computed by Annually Redetermining Life Expectancy
  • —————[v] The Surviving Spouse’s IRA Ownership Option
  • —————[vi] Spouse Dies Before Minimum Distributions Required
  • —————[vii] Qualifying the Surviving Spouse as the Sole Beneficiary
  • ———-[g] When Spouse Is Not the Sole Beneficiary
  • —————[i] EDB’s Choice of Distribution Method
  • —————[ii] Comparison of Distribution Methods
  • —————[iii] Distribution Based on Life Expectancy in the First Distribution Year
  • —————[iv] Special Rules for Beneficiary Rollover from Qualified Plan to IRA
  • ———-[h] Ten-Year Distributions to an IBD or the Beneficiary of an EBD
  • ———-[i] Distributions to Nondesignated Beneficiaries (NDBs)
  • ———-[j] Use of Trusts to Provide for Beneficiaries
  • —————[i] Trust Are Generally Nondesignated Beneficiaries
  • —————[ii] Designated Beneficiary Exception for See-Through Trusts
  • —————[iii] Use Conduit Trusts
  • —————[iv] Use of Accumulation Trusts with Identifiable Beneficiaries
  • —————[v] Use of Powers of Appointment
  • —————[vi] Applicable Multi-Beneficiary Trust (AMBT)
  • —————[vii] Separate Accounts, Separate Trusts, and Subtrusts
  • —————[viii] Spray Trust as Beneficiary of a Tax-Favored Plan
  • ———-[k] Planning with Trust Accounting Rules
  • —————[i] Special Allocations of Different Classes of Trust Income to Beneficiaries
  • —————[ii] Special Allocations of Trust Expenses to Classes of Income
  • —————[iii] Separate and Independent Beneficiary Shares in a Trust
  • —————[iv] Trust Transfers of Beneficial Interests in IRAs and Other Retirement Plans
  • —————[v] Charitable Contributions Paid by a Trust
  • ———-[l] Trusteed IRA as Alternative to Naming Trust as Beneficiary
  • ———-[m] Distributions in Excess of Required Minimum Distributions
  • ———-[n] Placing Benefits to Surviving Spouse in Trust
  • ———-[o] Use of Charitable Remainder Trusts
  • —–[3] Annuity Distributions to Beneficiaries
  • ———-[a] Annuity Distributions Generally
  • ———-[b] Meeting Initial Minimum Distribution Requirements for Annuities
  • ———-[c] Requirements Applicable to Lifetime Annuities
  • ———-[d] Payments to Younger Nonspouse Beneficiary
  • ———-[e] Life Annuity and a Period Certain
  • ———-[f] Exceptions Allowing Annuity Payments that Increase over Time
  • ———-[g] Changing the Annuity Payment Period
  • ———-[h] Separate Shares for Two or More Beneficiaries
  • ———-[i] Annuity Distributions by Traditional Defined Benefit Plans
  • ———-[j] Annuity Distributions by Defined Contribution Plans
  • —–[4] Community Property Interests: Spouses and Registered Domestic Partners
  • —–[5] Use of Disclaimers in Post-Mortem Tax Planning
  • —–[6] Designation of Charity as a Beneficiary
  • —–[7] Advantages of Personally Purchasing an Annuity
  • —–[8] Beneficiary Elections for Unfunded Nonqualified Plans
  • —-[9] Rollover of Military Death Gratuities and Life Insurance Proceeds
  • —-[10] National Guardsmen or Reservists Dying or Injured on Active Duty
  • —-[11] Planning to Reduce Federal Estate Taxes on Retirement Benefits
  • ———-[a] Federal Estate Taxes Generally
  • ———-[b] Use of the Marital Deduction for Retirement Benefits
  • ———-[c] Use of the Charitable Deduction for Retirement Benefits
  • ———-[d] Effective Use of the Applicable Exclusion
  • —————[i] Portability of the Applicable Exclusion
  • —————[ii] Traditional Planning May Still Be Useful
  • —————[iii] By-Pass Trust as Beneficiary of a Tax-Favored Retirement Plan
  • ———-[e] Effective Estate Planning

» Chapter 2 – QUALIFIED RETIREMENT PLANS