26 terms
HRB-10 Retirement Distributions
Annuity
• A FIXED SUM payable to a person at specified intervals for a specific PERIOD of time or for LIFE.
• Payments represent a partial return of capital and a return on the capital investment.
• Payments represent a partial return of capital and a return on the capital investment.
Beneficiary
The owner or RECIPIENT of funds in an account, such as an IRA, or from an insurance policy or will.
Contribution
• GIFT to a qualified charitable organization, generally deductible on Schedule A.
• Money placed in a retirement fund such as an IRA or an employer-maintained RETIREMENT PLAN.
• Money placed in a retirement fund such as an IRA or an employer-maintained RETIREMENT PLAN.
Defined Benefit Plan
• An employee benefit plan that provides determinable benefits not based on employer profits.
• The most common type of deferred benefit plan is a pension plan.
• The most common type of deferred benefit plan is a pension plan.
Defined Contribution Plan
• An employee benefit plan that provides a separate account for each person covered and pays benefits based on account earnings.
• Examples include 401(k) plans and profit-sharing plans.
• Examples include 401(k) plans and profit-sharing plans.
Disability Pension
• A taxable pension from an employer-funded disability plan or a disability provision of a retirement plan.
• Until the recipient reaches normal retirement age, usually reported on line 7 or Forms 1040 or 1040A and treated as wages for purposes of the child care, child tax, and earned income credits.
• Until the recipient reaches normal retirement age, usually reported on line 7 or Forms 1040 or 1040A and treated as wages for purposes of the child care, child tax, and earned income credits.
Distribution
Money or property a taxpayer RECEIVES from a retirement plan such as an IRA or an employer-maintained retirement plan.
Minimum Retirement Age
Varies depending on the plan.
• Social Security is 62
• IRA is 59 1/2
• Plan defined by the employer
• Social Security is 62
• IRA is 59 1/2
• Plan defined by the employer
Pension
• Payments RECEIVED periodically of a definite amount for a specified period (usually life) from an employer-maintained PLAN to workers who have met the stated requirements.
• It's primary purpose is to provide RETIREMENT INCOME.
• It's primary purpose is to provide RETIREMENT INCOME.
Rollover
• A qualified TRANSFER of funds from one tax-favored account to another, usually of the same type.
• A rollover must take place within 60 days of receiving the funds.
• A rollover must take place within 60 days of receiving the funds.
Roth IRA
A type of IRA in which contributions are not tax deductible, earnings grow tax deferred and qualified withdrawals are TAX FREE.
Traditional IRA
• Contributions may or may not be deductible depending on the taxpayer's AGI and whether or not he is covered under an employer-sponsored retirement plan.
• Earnings grow tax-deferred.
• Distributions are taxable except to the extent they represent nondeductible contributions.
• Earnings grow tax-deferred.
• Distributions are taxable except to the extent they represent nondeductible contributions.
SS: Taxation of Benefits
• Up to 80% of SS may be taxable. Usually none is taxable if SS is the only source of income.
• Forms SSA-1099 and RRB-1099 notify the client of total benefits received.
• Forms SSA-1099 and RRB-1099 notify the client of total benefits received.
SS: Earnings Limit
• The limit above which some benefits may need to be repaid is $37,680 for taxpayers who reached full retirement age in 2009.
• There is no earnings limit for recipients who reached full retirement age before 2009.
• There is no earnings limit for recipients who reached full retirement age before 2009.
SS: Computing Taxable Benefits
• The amount subject to federal tax varies from 0 to 85% depending on filing status and income.
• Based on MAGI, increased by one-half of the net benefits received.
• Based on MAGI, increased by one-half of the net benefits received.
SS: Modified AGI Calculation:
Sum of the following:
• Regular AGI
• Any excluded employer-provided adoption benefits
• Tax-exempt interest
• Any interest from qualified US Savings Bonds excluded because the taxpayer has qualified education costs.
• Any excluded foreign earned income or housing allowance or certain US possession income
• Any student loan interest deduction
• Any tuition and fees deduction
• Any domestic production activities deduction
• Regular AGI
• Any excluded employer-provided adoption benefits
• Tax-exempt interest
• Any interest from qualified US Savings Bonds excluded because the taxpayer has qualified education costs.
• Any excluded foreign earned income or housing allowance or certain US possession income
• Any student loan interest deduction
• Any tuition and fees deduction
• Any domestic production activities deduction
PA: Total Distribution
• All the taxpayers assets in the fund are distributed.
• A total distribution may qualify as a lump-sum distribution, eligible for the 10-year averaging/capital gain election. See Form 4972 or Pub 575.
• A total distribution may qualify as a lump-sum distribution, eligible for the 10-year averaging/capital gain election. See Form 4972 or Pub 575.
PA: Distribution Codes (1-A):
The more common codes:
1 - Early distribution, no known exception to penalty applies.
2 - Early distribution, exception to penalty applies
3 - Disability
4 - Death
7 - Normal distribution
A - May qualify for 10-year averaging and/or capital gain election
1 - Early distribution, no known exception to penalty applies.
2 - Early distribution, exception to penalty applies
3 - Disability
4 - Death
7 - Normal distribution
A - May qualify for 10-year averaging and/or capital gain election
PA: Distribution Codes (G-T):
G - Direct rollover to a qualified retirement plan, tax-sheltered annuity, 457(b) plan or IRA.
J - Early distribution from a Roth IRA, no known exception to penalty applies.
Q - Qualified distribution from a Roth IRA
T - Roth IRA distribution due to death or disability, or taxpayer has reached age 59 1/2, but the payer does not know if the five-year holding period was met.
J - Early distribution from a Roth IRA, no known exception to penalty applies.
Q - Qualified distribution from a Roth IRA
T - Roth IRA distribution due to death or disability, or taxpayer has reached age 59 1/2, but the payer does not know if the five-year holding period was met.
PA: Simplified Method Computation
MUST be used if the starting date is after November 18, 1996.
MAY be used to compute the taxable portion of a pension or annuity with a starting date after July 1, 1986 if the following TWO conditions are met:
• The payments must be from a qualified pension, profit-sharing or stock bonus plan; a qualified employee annuity plan; or a tax-sheltered annuity.
• The annuitant (receiver) must be under 75 when the payments begin, or if 75 or older there must be fewer than five years of guaranteed payments.
MAY be used to compute the taxable portion of a pension or annuity with a starting date after July 1, 1986 if the following TWO conditions are met:
• The payments must be from a qualified pension, profit-sharing or stock bonus plan; a qualified employee annuity plan; or a tax-sheltered annuity.
• The annuitant (receiver) must be under 75 when the payments begin, or if 75 or older there must be fewer than five years of guaranteed payments.
PA: Partly Taxable Pensions
• With starting dates after December 31, 1986, part of each payment received is excludible until the taxpayer has recovered his cost.
• Once the cost is recovered, the pension or annuity is fully taxable.
• If the taxpayer dies before the cost has been fully recovered, the unrecovered amount is deducted on the final return as a misc itemized deduction not subject to the 2% limitation.
• Once the cost is recovered, the pension or annuity is fully taxable.
• If the taxpayer dies before the cost has been fully recovered, the unrecovered amount is deducted on the final return as a misc itemized deduction not subject to the 2% limitation.
PA: General Rule For Calculation
• MAY be used if the taxpayer started receiving payments before November 19, 1996.
• If the taxpayer started receiving payments on or after that date, the SIMPLIFIED method MUST be used.
• For purchased annuities and other nonqualified plans, the general rule MUST be used regardless of stating date.
• If the taxpayer started receiving payments on or after that date, the SIMPLIFIED method MUST be used.
• For purchased annuities and other nonqualified plans, the general rule MUST be used regardless of stating date.
PA: Additional Caveats
• For P+A starting after July 1, 1986, and before November 19, 1996, both the payer and the recipient had the choice of using the general rule or the simplified method.
• The selected method generally must be used for all years of the pension.
• The selected method generally must be used for all years of the pension.
IRA Distributions From Traditional IRAs
• Usually shown on Form 1099-R as fully taxable because the IRA trustee does not know how much if any of the taxpayer's IRA contributions were nondeductible.
• If any nondeductible contributions had been made, the taxpayer MUST use Form 8606 to compute the taxable portion of any distributions.
• If any nondeductible contributions had been made, the taxpayer MUST use Form 8606 to compute the taxable portion of any distributions.
IRA Distributions From Roth IRAs
• Qualified distributions are exempt from tax.
• A qualified distribution is one that:
(a) Is taken after the end of the five-year period that began January 1 of the tax year for which the account was set up
(b) Is made after the account owner has died, become disabled, reached age 59 1/2, or is used to buy, build, or rebuild the taxpayer's first home.
• A qualified distribution is one that:
(a) Is taken after the end of the five-year period that began January 1 of the tax year for which the account was set up
(b) Is made after the account owner has died, become disabled, reached age 59 1/2, or is used to buy, build, or rebuild the taxpayer's first home.
Full Retirement Age