STOCK IRA
[b]Facts[/b]
1. John and Mary are married and are each 68 years old.
2. They have 3 children, ages 30, 35 and 40.
3. John is the 80% owner of a business with a profit sharing plan.
4. John’s current vested and accumulated value in the Plan is $2 million.
5. John plans on continuing to work full-time beyond age 70 until either his demise or future decision to retire.
6. The Plan has a TPA.
7. The TPA has indicated the following:
a. The Company can continue making annual profit sharing contributions for John beyond his attainment of age 70, which it could not do if the plan was a 401(k) plan
because John will continue to own more than 2% of the Company;
b. Annual distributions from the profit sharing plan to John must commence in the year of his attainment of age 70-1/2;
c. The required minimum annual distribution to John must be computed in the same manner as RMD’s from a Traditional IRA, using the Uniform Life Expectancy Table;
d. Upon John’s demise, his wife Mary, as the primary designated beneficiary has the two following options.
(i) Leave the funds in the profit sharing plan and take annual distributions commencing the calendar year after the year of John’s death using her single life
expectancy, or
(ii) Transfer the funds to her own individual Traditional IRA as the owner thereof, naming her children or individual conduit trusts on their behalf as her primary
designated beneficiaries.
[b]Questions[/b]
1. Is the TPA correct with regard to facts 7.a., 7.b., 7.c., 7.d.(i) and 7.d.(ii)?
If not, what are the correct answers?
2. If Mary pre-deceases John, can each of John’s children transfer their individual shares of her profit sharing plan to Traditional IRA’s, with each using the Table Minus 1 Method of withdrawals therefrom using their individual life expectancies commencing the calendar year after the year of John’s demise?
3. If Mary pre-deceases John and one or more of the children elect to leave their share of the funds in the profit sharing plan, over what period of time must they take annual distributions and how are such distributions to be computed?
4. If John pre-deceases Mary and she leaves the funds in the profit sharing plan and takes distributions as the beneficiary, upon her demise, what are the required annual distributions to the children, over what period of time, and how are they to be computed?
Permalink Submitted by Alan Spross on Thu, 2010-03-18 01:33
1. Is the TPA correct with regard to facts 7.a., 7.b., 7.c., 7.d.(i) and 7.d.(ii)?
If not, what are the correct answers?
I agree with all the above with the following changes:
a) A 401k plan for an ordinary employee could offer matching contributions after 70 if the plan document allowed it
ii) Spouse can name anyone or any entity she wishes as IRA beneficiary
2. If Mary pre-deceases John, can each of John’s children transfer their individual shares of her profit sharing plan to Traditional IRA’s, with each using the Table Minus 1 Method of withdrawals therefrom using their individual life expectancies commencing the calendar year after the year of John’s demise?
Only if they are named as contingent beneficiaries. If they acquire their share through his estate, they cannot use their own life expectancies, and would be stuck with the 5 year rule if John passes prior to his required beginning date with his estate as beneficiary.
3. If Mary pre-deceases John and one or more of the children elect to leave their share of the funds in the profit sharing plan, over what period of time must they take annual distributions and how are such distributions to be computed?
Again, if they are named as contingent beneficiaries on the plan, they could request the plan to create separate accounts for each of them and then use their non recalculated life expectancies in the same manner as for an inherited IRA. What is relatively new here, is that they could also convert their shares to inherited Roth IRAs if they wish. They cannot do that with an inherited IRA, only with an inherited qualified plan.
4. If John pre-deceases Mary and she leaves the funds in the profit sharing plan and takes distributions as the beneficiary, upon her demise, what are the required annual distributions to the children, over what period of time, and how are they to be computed?
If Mary passes before the year she is required to start RMDs as a beneficiary (the year John would have reached 70.5), she is treated as the owner. If she has named the children as successor beneficiaries, they can then create separate accounts and take RMDs over their life expectancy. BUT- once the year arrives that John would have had to take RMDs, all this changes. The children (if named) would then have to calculate their RMDs as successor beneficiaries rather than designated beneficiaries, and their RMDs would be based on the non recalculated life expectancy of Mary. This would reduce their stretch considerably. What this means is that by the year John would have reached 70.5, she should roll over the plan balance to her own IRA.