Employee Plans Retirement: A Taxing Matter William Lee Employee Plans Specialist 215-553-7634 William.Lee@irs.gov October 18, 2012

Embed Size (px)

Text of Employee Plans Retirement: A Taxing Matter William Lee Employee Plans Specialist 215-553-7634...

  • Employee PlansRetirement: A Taxing Matter

    William LeeEmployee Plans Specialist215-553-7634William.Lee@irs.gov

    October 18, 2012

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Distribution RestrictionsSEPSIMPLE IRAIRARoth IRA

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Pre-Retirement DistributionsHardship distributionsPlans not required to allow for themImmediate and heavy financial needLimited to amount necessary to satisfy needLoans

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Hardships and Loan TaxationHardship distributionsNo mandatory 20% withholdingSubject to income tax10% early distribution tax may applyMay not be rolled overTaxable participant loansUpon separation from serviceFailure to make loan payments

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*In-Service Distributions 401(k) may allow at age 59 Profit-sharing may allow afterReaching a fixed age, orA fixed period of timeDefined benefit and money purchase plans may allowAt age 62 Even if normal retirement age is later

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Types of Distributions at RetirementLump sumInstallmentsAnnuity

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Distribution GuidanceCombination of lump sum and annuityLongevity annuitiesTransfer lump sum from 401(k) to same employers DB plan to receive an annuitySpousal protection

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Easier to Offer Annuity + Lump SumStreamlined calculation of annuity with a partial lump sum Annuity portion - Use plans stated conversion factors Lump sum portion Use prescribed actuarial assumptions

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Longevity AnnuitiesBefore Required minimum distribution obstacleAfterQualified Longevity AnnuityIf annuity costs < 25% of account balance or, if less, $100,000, and begins by age 85, it is disregarded in determining RMD

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*401(k) used to Purchase Annuity from ERs DB PlanBeforeUncertainty if it was ok and what rules to followAfterRevenue Ruling 2012-4 provides a road map for offering this option to employees

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Spousal ProtectionBeforeUncertainty of when and how spousal consent rules apply to deferred annuity investment optionsAfterRevenue Ruling 2012-3

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Contributing to Plan after RetirementDifferent employerCan contribute to new employers plan without consequenceSame employerCould have payments suspendedAlso applies to retirees covered by an industry-wide multiemployer plan

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Contributions to IRAs after RetirementYou must have earned incomeTraditional IRAMust be less than 70 Roth IRACan be any age, but There are income limits if a Roth IRA

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*When are Social Security Benefits Taxable? Soc Sec benefit + all other incomeSingle or HOH combined income$25k to $34k, up to 50% taxableOver $34k, up to 85% taxableMarried filing joint combined income$32k to $44k, up to 50% taxableOver $44k, up to 85% taxableMarried filing separate all taxable

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*$32K Combined Income, MFJ, 15% BracketNeeds $10,000 for trip to HawaiiWithdraws $12,000$6,000 SS benefit now subject to tax$18,000 x 15% = $2,700 tax$12,000 distribution nets:$12,000 - $2,700 = $9,300Net Social Security benefits reduced by $900

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Working and Social Security BenefitsPermissible to work and receive SSIf under full retirement ageDeduct $1 for every $2 earned above $14,640Year in which full retirement age reachedDeduct $1 for ever $3 earned above $38,880At full retirement age - No limit

    Retirement A Taxing Matter

  • Retirement A Taxing Matter* Social Security StrategiesTake it:EarlyAt full SS retirement ageAt 70Risk of outliving retirement savings

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Reporting Distributions on Form 1099-R

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Common 1099-R Box 7 Codes1 = early distribution, no exception2 = early distribution, exception7 = normal distributionsG/H = direct rollover to IRA/planL = loan treated as distributionS = early distribution from SIMPLEP or 8 = excess contributions/deferrals taxable; depends on year taxed

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Trustee-to-Trustee TransferGenerally not reported on 1099-RExceptionsIRA recharacterizationRoth IRA conversionPension to IRA

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Special SituationsRequired Minimum DistributionsStill working at same employerStill working at a different employerWork beyond 70 - Separate from service on 12/31/xxWhen is RMD due?Started RMD, rehired Can I stop RMD?Retire again on 12/31/xx. When is RMD due?No longer 5% owner

    Retirement A Taxing Matter

  • Retirement A Taxing Matter*Questions and Resourceswww.irs.govRetirementPlanQuestions@irs.gov877-829-5500Newsletters

    Retirement A Taxing Matter

    **********************