10 Things You Probably Didn’t Know About Retirement Plans (2 of 2)

By Marvin Rotenberg, IRA Technical Expert

Last week we presented Part I of “10 Things You Probably Didn’t Know About Retirement Plans,” which we hope you found helpful. Here is the conclusion.

6) Tax Breaks for Beneficiaries
Special tax benefits available to certain qualified plan participants taking lump sum distributions, such as net unrealized appreciation (NUA), 10 year income averaging and pre-1974 capital gains elections, are also available for use by their inheriting beneficiaries. Generally, NUA is available to anyone receiving an in-kind distribution of employer securities from a plan. The other benefits are applicable only with respect to a plan participant who was born prior to January 2, 1936, and can be elected just once after 1986.

7) Income Beneficiaries of Trusts May Receive Only 10% of the Expected Amount
Income beneficiaries of a trust that is a beneficiary of an IRA or qualified plan may be in for a rude surprise. More than 40 states have adopted the Uniform Principal and Income Act, which provides that an RMD paid to a trust from an IRA or qualified plan shall consist of 90% principal and 10% income. Therefore, distributions from a trust that limits the trustee to distributing only the income will include just 10% of the RMD. This could result in the loss of the marital deduction in QTIP trusts.

8) Roth Recharacterization Tax Confusion
A Roth conversion can be recharacterized back to a traditional IRA for any reason up to October 15th of the year following the year of conversion. If a full recharacterization is completed, the total income tax that was paid or would have been due on the conversion is eliminated, even if the account has declined in value. Also, any gains that were earned after the conversion will be moved as part of the recharacterization, without any tax consequences.

9) Prenuptial Agreements Are Not Valid for Qualified Plan Assets
The waiving of rights by a fiancé in a prenuptial agreement to all or a portion of their future spouse’s qualified plan benefits is not enforceable. Under ERISA, only a person who is the plan participant’s spouse at the time they consent can waive the rights to these assets. Regardless of future status, a fiancé does not qualify.

10) You Must Be Age 70 ½ or Older to make a Qualified Charitable Distribution (QCD)
Unlike RMDs, which begin for IRA owners in the year they turn age 70 ½, a QCD can only be made by an IRA owner or beneficiary who has actually attained age 70 ½ or older at the time the distribution is made. Currently, the QCD provision is in effect through the end of 2011.