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Late Retirement

For some people in some retirement plans, the 'required beginning date' for minimum distributions doesn't arrive until retirement.

Natalie Choate, 07/13/2012

Natalie Choate will be speaking at a location near you if you live in Boston (9/12/12 and 11/19/12); Philadelphia (7/18/12); South Bend (9/20/12) or Evansville (11/16/12), Ind.; Salt Lake City (9/28/12); San Antonio (10/1/12); Minneapolis, Minn. (10/9/12); Atlanta (10/19/12); San Diego (10/20/12); Albany, N.Y. (10/23/12); Iselin, N.J. (10/24/12); Orlando, Fla. (Jan.17–18, 2013); or Overland Park, Kan. (4/26/13). See all of Natalie's upcoming speaking events.

Normally minimum required distributions start at age 70½, but for some people in some retirement plans, the "required beginning date" for minimum distributions doesn't arrive until retirement. Here are some recent questions from my readers about that "special deal."

Question: My client "Jeff," who is turning age 75 in 2012, retired from his job at Giant Company on Dec. 31, 2011. Jeff was not a "five percent owner" of Giant, so he was not required to take any minimum distributions from Giant's plans until retirement. In January 2012, the Giant Co. profit-sharing plan sent his entire plan balance of $200,000 via direct rollover into Jeff's IRA, which I administer. The IRA balance as of Dec. 31, 2011, was $1 million. With the addition of the direct rollover, the balance is now $1.2 million. Jeff took his minimum distribution for 2011 from his IRA, but he has not taken any distribution yet from the IRA for 2012, and he never received any distributions at all from the profit-sharing plan. How do I compute his 2012 minimum distribution from the IRA? Has this been handled correctly so far?

Answer: The plan did not handle the terminating distribution correctly.

Because Jeff retired "in" calendar year 2011, 2011 was his first "distribution year" with respect to the Giant profit-sharing plan. His "required beginning date" (the deadline for taking the 2011 required distribution from the plan) was therefore April 1, 2012. Accordingly, the plan should have paid to Jeff directly the plan's minimum required distribution for 2011. A minimum required distribution is not an "eligible rollover distribution," and therefore a plan is supposed to pay the minimum required distribution directly to the retired employee personally before the plan transmits any direct rollover funds to the individual's IRA.

Furthermore, since the plan did not distribute anything from the account until January 2012, Jeff (even though he retired in 2011) was still a plan participant as of the beginning of 2012, and therefore another minimum distribution from the profit-sharing plan "accrued" for the year 2012. This amount also should have been distributed by the plan directly to Jeff and not transferred (rolled over) to Jeff's IRA.

Let's say Jeff's minimum required distribution from the Giant plan for the year 2011 was $8,000, and his 2012 required distribution from the plan was $9,000, for a total of $17,000. That amount ($17,000) should have been distributed by the plan directly to Jeff (with no income taxes withheld unless he requested them to do so). Instead it was direct-rolled into Jeff's IRA.

However, even though it's the plan that made the mistake here, it's the employee who must pay the price, and you (as his advisor) who must help him clean up the mess. Because the money was actually distributed out of the Giant profit-sharing plan, the IRS deems that the minimum distribution was in fact taken. Therefore there is no 50% penalty for a "missed minimum required distribution." The penalty for a missed required distribution in our example would have been $8,500 (50% times $17,000). That's the good news.

Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the 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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