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Retirement Plan Riddles and Stumpers

When is the same distribution both required and not required, and other tax-related enigmas.

Natalie Choate, 05/12/2017

In honor of spring, the silly season, here is a selection of retirement plan riddles and conundrums brought to you by the Internal Revenue Service.

Stumper number 1: The tax law says you need a year-end valuation of all your IRAs. Do you include annuity contracts in that valuation or not?

The answer is ... it depends! If you are valuing your IRAs for purposes of computing a required minimum distribution, then true annuities held in any IRA are excluded from that value. (See my July 2016 column for the special RMD rules for IRA-owned annuity contracts.) But if you need the year-end value to compute how much of any IRA distribution you received during the year is taxable--including distributions from the annuities--then the value of the annuity contracts is included.

Enigma number 2: When is the same distribution both required and not required?

Actually two answers to this one!

The first is, the year you turn age 70 1/2. That's your first distribution year for your IRA, so a distribution is required for that year--but you don’t have to actually take that distribution until April 1 of the following year (your required beginning date), unless you want to do a Roth conversion in the age-70 1/2-year, in which case you must take the RMD for that year before you can do the conversion. So the RMD is not required, unless you want to do a Roth conversion from your IRA, in which case it is required!

And the second answer: You are older than 70 1/2 and still working for a company where you are less than a 5% owner. In this instance, you are entitled (as far as the tax law is concerned) to postpone your RMDs until the year you actually retire. But the company plan does not recognize that deferred RMD date--the plan starts distributions the year you reach 70 1/2 even if you are not yet retired. So the IRS says, the plan sends you money and says it is a required distribution, but it really isn't, so you can roll it over into an IRA. In other words the check is an RMD when it leaves the plan but it is not an RMD when it arrives in your mailbox! 

Riddle number 3: Your client made an excess IRA contribution. Now she wants to fix the mistake, so she's going to withdraw the excess contribution. Does she have to withdraw earnings on the contribution, or just the contribution itself?

Natalie Choate practices law in Boston with Nutter McClennen & Fish LLP, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is a leading resource for professionals in this field.

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.

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