Morningstar Advisor - Spring 2008 - (Page 38) Spotlight to outside assets. Do take the RMD late in the year if you are trying to do the opposite. Stop RMDs Legally There are two legal ways to stop IRA RMDs: Do convert the IRA to a Roth IRA. 8 Do have him take distribution of the stock first (because that’s the part he doesn’t want to roll over). That distribution will fulfill his RMD for the year, and he can roll over the rest of the account to an IRA later in the same year. 7 Get Rid of Aftertax Money Distributions are a pain for a participant who has aftertax money (basis) in his IRA. Generally, any distribution he takes is deemed to come proportionately from the nontaxable and taxable portions of his IRAs; and all of his traditional IRAs are aggregated for purposes of allocating basis to distributions from any particular traditional IRA. Ed Slott, CPA, a leading writer and speaker on IRAs, calls this the “cream-in-the-coffee” rule: Each time you take a “sip” (distribution) from an IRA, you get proportionate amounts of “coffee” (pretax money) and “cream” (aftertax money). Not only does this formula result in recouping only a tiny portion of basis each year, but also it is time consuming because the fraction must be recomputed annually. If the IRA owner also participates in a qualified retirement plan (QRP): Do stop this annoyance by using an exception to the cream-in-the-coffee rule. When IRA money is rolled into a QRP, the rollover is deemed to come from the pretax money first (because aftertax money cannot be rolled from an IRA into a QRP), so roll the pretax portion of the IRA into a QRP. There are no RMDs from a Roth IRA during the participant’s life. Do roll the IRA into a QRP at a company where the participant is still working. If the participant owns 5% or less of the plansponsoring employer, RMDs from the QRP can be postponed until after retirement. 10 Take Extra Distributions When Feasible Do consider having the client take more than her RMD—either by taking a distribution or by doing partial Roth IRA conversions, if eligible—in any year when her income tax bracket is lower than usual either due to lower than usual income or larger deductions (such as a net operating loss or excess charitable deduction carry-forward), or if she is subject to the AMT (if that rate is lower than her usual tax bracket). K Natalie B. Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is often called the "bible" of IRA distribution planning. Follow These Rules for Rollovers and RMDs A RMD is not an eligible rollover distribution, and the first money that comes out of a plan in any year is deemed to be the RMD. Don’t try to do a “rollover” before taking the RMD for the year. A participant who is retiring in the year he reaches age 70½ cannot roll over his 401(k) balance in that year until after he has taken that year’s RMD from the 401(k) plan—even though he would otherwise not be required to take that age-70½-year RMD until April 1 of the following year. 9 For more detail and full citations on these strategies, see the author’s report, “The 183 Best and Worst Planning Ideas for Your Client’s Retirement Benefits,” available through her Web site www.ataxplan.com. The ideas in this article represent the author’s opinions and views, which are not necessarily shared by all practitioners. After rolling pretax money into a QRP, the leftover “stub” IRA consists of aftertax money: Do cash this out tax-free (or, better yet, convert it to a Roth IRA tax-free). Consider a participant who is retiring in the year he reaches age 70½ and whose 401(k) plan holds employer stock with “net unrealized appreciation” (NUA) as well as cash. The employee wants to take a lump-sum distribution that includes the NUA stock (so he’ll be currently taxed only on the plan’s basis in the stock and get capital gains treatment when he later sells the stock), and to roll over the cash portion of the account to an IRA for further deferral. 38 Morningstar Advisor Spring 2008 http://www.ataxplan.com
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