Retirement Plan Distributions

Question 1: A Penalty-Free Retirement Plans  

ESOP account becomes a penalty-free account after a member attains 59 ½ years. However, Chad is currently 58 years old. If Chad chooses this option, he will be penalized. Before an account holder reaches 59 ½ years, a 10 % excise tax will be imposed upon withdrawal unless the withdrawal is made after the account owner's death (Blankenship, 2020). Thus, it is not the best option for Chad to choose. 

A 40 (k) plan from CRP Inc. also becomes a penalty-free account after a member attains 59 ½ years. But, Chad is currently 58 years old (Blankenship, 2020). If Chad chooses this option, he will be penalized 10% excise tax for early withdrawal. Therefore, Chad should not consider this option.  

A 40 (k) plan from Schlumberger becomes a penalty-free account after a member attains 59 ½ years. Chad is 58 years old at the moment. If Chad chooses this option, he will 10% early withdrawal tax. Thus, it is not the best option for Chad.  

Roth IRA becomes a penalty-free account after a member attains 59 ½ years. But, Chad is currently 58 years old (Blankenship, 2020). If Chad chooses this option, he will be penalized 10% 10% early withdrawal tax. Hence, it is not the best option for Chad.  

Traditional IRA becomes a penalty-free account after a member attains 59 ½ years. But, Chad is currently 58 years old (Blankenship, 2020). If Chad chooses this option, he will be penalized 10% early withdrawal tax. Thus, it is not the best option for Chad.  

Inherited IRA becomes a penalty-free account if the account hold inherits a pre-tax account. In this case, no 10% penalty for early withdrawals (Blankenship, 2020). Since Inherited IRA with a pre-tax allows Chad to take a penalty-free withdrawal to fund his vacation. Therefore, Chad should use Inherited IRA as the best option to fund his $ 20,000 vacation.  

Question 2: Can Chad Change the beneficiary designation on IRAs without spousal consent? 

Chad can change the beneficiary designation on Individual Retirement Account (IRA) without his wife's consent. Chad lives in New Orleans, Louisiana state. Louisiana state laws allow an account holder of an Individual Retirement Account (IRA) to change the designations without the spouse's permission (Blankenship, 2020). But Louisiana state laws grant his wife rights to some or all his IRA or, in some cases, requires spousal permission to non-spousal or close relative an Individual Retirement Account (IRA) beneficiary.  

Question 3: Can Chad change the beneficiary designations on his non-IRA retirement plans without spousal consent? 

A non-Individual Retirement Account (IRA) does not offer an account holder tax advantages available in Individual Retirement Account (IRA). But it has no restriction on how an account holder manages his or her money. It is more flexible. An account holder can invest, withdraws, or change a beneficiary at any time without spousal's consent (Blankenship, 2020). Also, a non-Individual Retirement Account (IRA) does not have state law restrictions where an account holder has the right to change only upon reviewing the state laws. Under this plan, an account owner is more flexible and has more privileges to enjoy concerning beneficiary change. Therefore, Chad is can easily change the beneficiary on his non- Individual Retirement Account (IRA) with his wife's knowledge or consent. 

Question 4: If the balance in Chad's Mom's IRA was $120,000 at the end of last year and $140,000 at the end of this year, how much, if any, must he take out from this account to satisfy the minimum distribution rules? 

An inherited Individual Retirement Account (IRA) is opened when an individual inherits an Individual Retirement Account (IRA) or an employer-sponsored retirement plan upon an original owner's death. The beneficiary is allowed to make any withdrawals but is not allowed to contribute to the account. In case a beneficiary wants to make any withdrawal from an inherited Individual Retirement Account, the Internal Revenue Service provides that a beneficiary can withdraw part of tax-deferred savings from the account after reaching 72 years or if the beneficiary attained age 70½ before 2020 or after the beneficiary inherited Individual Retirement Account (Blankenship, 2020). In such a scenario, the withdrawal is minimum distribution. Since Chad is 58 years, he is not eligible to make any tax-free withdrawal from the inherited Individual Retirement Account because he has not attained 72 years or reached age 70½ before 2020 or after the inherited Individual Retirement Account. Therefore, Chad will withdraw the benefits from the account at a 10% tax charge.  

Benefit withdrawal = (Account balance at the end of this year – Account balance of last year) x 90%. 

Benefit withdrawal = ($ 140,000 - $ 120,000) x 90% 

Benefit withdrawal = $ 20,000 x 90% 

Benefit withdrawal = $ 18,000 

Therefore, Chad can only withdraw $ 18,000 from the inherited Individual Retirement Account before attaining 72 years or attained age 70½ before 2020 or after inherited Individual Retirement Account due to tax penalty imposed on the amount inherited.  

Question 5: If Chad were to die in 2020 and River was to inherit the inherited IRA, how would he comply with the minimum distribution rules? 

The Internal Revenue Service requires non-spouse beneficiaries to take Required Minimum Distribution (RMD) from the inherited assets at the start of the year following the year of death of the original account owner. However, the first Required Minimum Distribution (RMD) must come from the new inherited Individual Retirement Account latest by 31st December of the following year (Blankenship, 2020). If Chad were to die in 2020, the inherited Individual Retirement Account and Required Minimum Distribution (RMD) rules would allow River to start making any withdrawal from the beginning of 2021. The last withdrawal date that River should make any withdrawal should be 31st December 2022. Since River is a beneficiary of the two accounts: the Traditional Individual Retirement Account (IRA) and Inherited Individual Retirement Account (IRA) accounts, he will be eligible to make withdrawal upon meeting the inherited Individual Retirement Account and Required Minimum Distribution (RMD) rules.  

Question 6: Assuming Chad decided to take out the entire balance in the Roth IRA to purchase a new fishing boat, how would the distribution be taxed? 

Roth IRA becomes a penalty-free account after a member attains 59 ½ years. But, Chad is currently 58 years old. If Chad decided to take out the whole current FMV amount of $ 45,000 from the account to purchase a fishing boat, he would be penalized 10 % of the total amount withdrawn (Blankenship, 2020). In this case, Chad will pay two types of taxes: income taxes and a 10% penalty tax on the account's total earnings. However, the law provides a waiver on the 10 % penalty only if the account holder meets one of the eight exceptions that allow early withdrawal. For example, meeting the five-year rule or having attained age 59½ (Blankenship, 2020). Unfortunately, Chad does not meet any of the two most crucial rules. Thus, he will pay a tax income tax plus a 10% tax penalty on the amount withdrawn from the account.  

Question 7: If Chad took a $20,000 distribution from his traditional IRA to pay for the vacation, what are the tax implications? 

The Traditional IRA becomes a penalty-free account after a member attains 59 ½ years. But, Chad is currently 58 years old. If Chad chooses to pay the vacation fee, he will pay both income tax and a penalty of 10% on the amount withdrawn ($ 20,000). Depending on the account's nature, a Traditional IRA, Chad will pay zero income tax by will pay a 10% penalty on $ 20,000 because he makes a withdrawal before attaining 59 ½ years (Blankenship, 2020). Also, Chad will be taxed at his current income tax rate based on his income level. In this can, Chad will suffer on the penalty tax implication of 10% on the $ 20,000. 

Question 8: If Chad retires, what should he do with CRP share and why?  

An Employee Stock Option Plans (ESOPs) accounts are too risky a pension plan; however, these accounts are currently diversifying for some assets covered in the plan. Besides, Employee Stock Option Plans (ESOPs) are relatively less volatile and offer higher real returns to employees (Blankenship, 2020). Therefore, Chad should retain his Employee Stock Option Plans (ESOPs) from CRP even after retiring to continue earning his higher returns. 

Question 9: If Chad were to die in 2020, what options would Patricia have for satisfying the minimum distribution rules on the Roth IRA account? 

Suppose Chad was to die in 2020, Patricia has to open an inherited Individual Retirement Account (IRA) and treat it as hers, or she can have an option of transferring the new Individual Retirement Account (IRA) into her existing Individual Retirement Account (IRA) (Blankenship, 2020). Regardless of the choice she chooses, Individual Retirement Account (IRA) will help her continue to grow money deposited for any period until she decides to withdraw the whole amount from the account. However, Patricia will have to pay taxes from any income earned. Suppose Patricia opens an inherited Individual Retirement Account (IRA) account after Chad's death and withdraws all savings. In that case, she will pay 10% tax on the benefits plus an income tax based on the amount of income received (Blankenship, 2020). Therefore, Patricia should consider a reinvesting option and invest all earnings from Chad's Individual Retirement Account (IRA) account to hers to generate more income. 

Question 10: Assume Chad takes a distribution of the CRP stock several years from now when the stock is valued at $500,000. A few years later, Chad has a terrible accident and dies. The value of the CRP stock at the time of his death is $700,000. Patricia inherits the stock and sells it six months after Chad dies for $800,000. What are the tax implications of the sale? 

Patricia can sell her inherited ESOP account from CRP upon the death of Chad. If she sells the stock after attaining 59 ½ years, she will only pay income tax and not pay a tax penalty. But if she sells inherited CRP stock before reaching 59 ½ years, Patricia will pay both income tax and a 10% withdrawal penalty. The 10% excise tax penalty will be calculated as follows:  

Excise tax = 10% x amount withdrawn  

Excise tax = 10% x $ 800,000 

Excise tax = $ 80,000 

Therefore, Patricia will pay $ 80,000 plus income tax based on her total income earned for the period.  

References 

Blankenship, V. J. (2020). The SECURE Act: Retirement Plan Distributions after the Death of a Beneficiary.  The Tax Lawyer, Forthcoming .