2015, College for Financial Planning, all rights reserved.
Session 12 Distributions and Rollovers CERTIFIED FINANCIAL PLANNER
CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning
& Employee Benefits
Slide 2
Session Details Module7 Chapter(s)1, 5 LOs7-1 Identify the
characteristics of retirement plan distributions. 7-3 Identify and
analyze lump-sum options available to participants, including
rollovers. 12-2
Slide 3
In Service Distributions IRA & IRA hybrid plans Profit
sharing plans Pension plans 12-3
Slide 4
Hardship Withdrawals & Loans Employer may offer, but are
not required Hardship withdrawals Elective deferrals only 10% early
withdrawal penalty does apply Loans $50,000 or 50% of balance
maximum 5-year limit (except for home) QDROs Exempt from 10%
penalty 12-4
Slide 5
Early Withdrawal Penalty Exceptions IRA refers to traditional
IRAs. Roth IRAs have different withdrawal rules. Death Disability
Medical expenses above 10% (7.5% if age 65 or older) All Plans
First-time home purchase up to $10,000 Health insurance premiums
while unemployed IRA Only Separation from service after age 55
Qualified domestic relations order (QDROs do not apply to IRA
accounts) All Except IRA 12-5
Slide 6
Substantially Equal Payments: Reg. 72(t) Minimum age to begin
None Maximum age to begin 59 Frequency of payments At least once a
year Duration of payments Greater of five years or age 59
IRS-approved calculation methods Life expectancy Amortization
Annuitization Ordinary income tax applies Yes 10 percent penalty
tax applies No Must be separated from service for a 72(t)
distribution from a qualified plan or TSA 12-6
Separation from Service Options Several separation from service
options are available for qualified and 403(b) plans. Available
distribution options are: Leave with employer Transfer to new
employers plan Annuitization Lump-sum distribution IRA rollover
12-8
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Separation from Service Choices Made OptionPercentage
Annuitize1% Transfer to new employers plan5% Leave in the plan25%
Cash payment31% IRA rollover38% Source: Capturing the Opportunity
of the 21st Century, LIMRA 2003 12-9
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Lump Sum Definition Four conditions required for distribution
to be considered a lump sum: 1. Made from qualified pension, profit
sharing, or stock bonus plan 2. Represents full amount credited to
participant accounts 3. Distributed in one taxable year 4. Payable
due to: o participants death o attainment of age 59 o separation
from service o disability 12-10
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Ten-Year Forward-Averaging Tax Treatment Eligibility
Participants must have been born in 1935 or earlier Distribution
must be a lump sum Forward-averaging treatment must be elected on
all lump-sum distributions in tax year Only one forward-averaging
election allowed in lifetime Steps Use 10-year averaging on
ordinary income portion Treat pre-1974 portion of gain as long-term
capital gain 12-11
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Should you do an IRA rollover? Leave with employerRollover Not
always allowedAlways allowed Tax-deferred growth Limited investment
choicesMany investment choices Less beneficiary designation
flexibilityMore beneficiary designation flexibility All withdrawals
are taxed as ordinary incomeCompany stock may be partially taxed as
capital gains May be able to convert directly to Roth IRAMay
convert directly to Roth IRA Early withdrawal penalty age 55 if
separate from service after age 55 Early withdrawal penalty age 59
RMD can begin later than age 70RMD must begin at age 70 12-12
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Rollover Distributions To preserve 10-year forward averaging:
Qualified plan to conduit IRA to qualified plan Time period for
completion of rollover: Indirect rollover must be completed within
60 days Eligible rollover distributions are distributions of all or
any part of a qualified plan account, except: Nontaxable portion of
distribution Part of a series of substantially equal periodic
payments over 10 years or relevant life expectancy Required minimum
distribution (age 70) Corrective distributions Loan treated as a
distribution Dividends on employer securities in an ESOP Cost of
life insurance coverage Hardship distribution 12-13
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Types of Rollovers Conduit IRAs Direct rollovers Trustee to
trustee Indirect rollover (60-day limit, 20% withholding applies)
Spousal beneficiary rollover Nonspouse beneficiary rollover
12-14
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Permissible Rollovers Roll to IRASEP-IRA SIMPLE IRARoth IRA
Government 457(b)403(b) Qualified Plan Designated Roth Account Roll
from IRAYES NOYES, but taxable YES, must have separate accounts YES
NO SEP-IRAYES NOYES, but taxable YES, must have separate accounts
YES NO SIMPLE IRA YES, after two years YESYES, after two years, is
taxable YES, must have separate accounts YES, after two years NO
Roth IRANO YESNO 457(b)YES NOYES, but taxable YES Yes, after
9/27/10 403(b)YES NOYES, but taxable YES, must have separate
accounts YES Yes, after 9/27/10 Qualified Plan YES NOYES, but
taxable YES, must have separate accounts YES Yes, after 9/27/10
Designated Roth Account NO YESNO YES, if a direct trustee-
to-trustee transfer 12-15
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Practice Problem 1 What are the exceptions to the 10% early
withdrawal penalty tax for the following scenarios? a. Exceptions
that apply to all plans 1. ___________________________ 2.
___________________________ 3. ___________________________
12-16
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Practice Problem 1 continued b. Exceptions that apply only to
qualified plans and 403(b) plans 1.
________________________________ 2.
________________________________ 3.
________________________________ 12-17
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Practice Problem 1 continued c. Exceptions that apply only to
IRA accounts 1. ________________________________ 2.
________________________________ 3.
________________________________ 4.
________________________________ 12-18
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Question 2 Clark Benson was born in 1935, and he is still
employed at Oak Enterprises, Inc. He has accumulated $250,000 in
Oak Enterprises profit sharing 401(k) plan after more than 20 years
of employment; to date, he has taken no distributions from the
plan. He plans to take distribution of the full account when he
retires next year. Which of the following describe the tax
consequences of Clarks planned distribution schedule? I.not subject
to 10% penalty II.subject to 15% mandatory withholding III.subject
to 50% minimum distribution penalty IV.eligible for 10-year forward
averaging a.I and IV only b.II and III only c.III and IV only d.I,
II, and III only e.I, III, and IV only 12-19
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Question 3 At age 57, Anita Buford retired from PQR Corporation
in January this year after 15 years of service. She received a
check for the distribution of her account in the PQR Money Purchase
Plan. Her account balance was $60,000 on her final day of
employment. Which of the following statements describe the income
tax or penalty tax consequences of this distribution? I.subject to
10% penalty II.subject to mandatory 20% withholding III.eligible
for 10-year forward averaging IV.exempt from the 10% early
withdrawal penalty a.I and II only b.II and III only c.II and IV
only d.I, II, and III only e.I, II, and IV only 12-20
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Question 4 Which of the following distributions would be exempt
from the 10% early withdrawal penalty for qualified plans, 403(b)
plans, and IRA accounts? I.distribution due to disability
II.distribution due to death III.distribution for medical expenses
in excess of 7.5% of AGI IV.distribution for qualified
postsecondary education expenses a.I and II only b.II and III only
c.I, II, and III only d.I, II, III, and IV 12-21
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2015, College for Financial Planning, all rights reserved.
Session 12 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee
Benefits