RETIREMENT PLAN DISTRIBUTIONS
For taxpayers who have attained the age of 70½, an exclusion of up to $100,000 from gross income is available for IRA distributions that are qualified charitable distributions made directly to a qualifying charitable organization. The distributions must be:
• Made after the IRA owner attains age 70½;
• Made directly to a qualifying charitable organization (public charity); and
• Entirely deductible as a charitable contribution. If the deductible amount is reduced due to a benefit received or if the donor does not obtain sufficient substantiation, the exclusion is not available for any portion of the distribution.
A taxpayer may use his required minimum distribution to fund the donation. The retirement plan distribution exclusion is not applicable for taxable years beginning after 2009, unless extended by Congress.
Participants in qualified pension plans, other than five-percent owners of the employer, can delay taking distributions out of the plan until the later of April 1 of the calendar year after they reach age 70½ or the end of the taxable year in which they retire. Plans may (but are not required to) allow active employees, who are already receiving benefits, to stop receiving them. Distributions would then resume when the employee retires.
Distributions out of a regular IRA can be deferred to a date not later than April 1 of the year after you reach age 70½ (Roth IRAs are not subject to any minimum distribution requirements). If you elect to defer your first IRA distribution to the year after you reach age 70½, that distribution, plus the required distribution for that year, will be taxed in that year.
Example: Individual reached age 70½ in 2009 but waited until April 1, 2010, to take the required distribution from his IRA for the year 2009 based on the December 31, 2008, IRA account balance. Individual must also take a distribution by December 31, 2010, for the 2010 year based on the December 31, 2009, IRA account balance, with certain adjustments. Therefore, Individual is taxed on two distributions in 2010. If the second distribution is not made by December 31, 2010, Individual is subject to a 50-percent excise tax on the amount that should have been distributed.
The taxable portion of a qualified retirement plan distribution generally can be rolled over tax-free into a regular IRA or another qualified plan. However, tax-free rollover treatment is not available if the distribution is one of a series of substantially equal payments over a specified period of ten years or more, over the life expectancy of the employee, or over the joint life expectancies of the employee and the employee’s beneficiary. Minimum distributions, generally required to begin at age 70½, also cannot be rolled over.
Qualified plans must allow participants to transfer eligible rollover amounts directly to an IRA or other qualified plan in a trustee-totrustee transfer. If a trustee-to-trustee transfer is not made, the plan is required to withhold a 20-percent income tax on the distributed amount even if within 60 days the employee transfers the distribution to an IRA. This may result in an overpayment of tax, since the amount rolled over is not included in gross income.
Example: Employee E retires at age 54 on January 1, 2009, and is entitled to receive a $100,000 lump-sum distribution from his employer’s profit-sharing plan. E does not elect a direct trusteeto-trustee transfer of his $100,000 to an IRA. At the time of the distribution, the employer must withhold $20,000 in federal income taxes from the distribution. E receives the remaining $80,000 on January 10, 2009, and transfers it to an IRA on January 11, 2009.
E will have $20,000 of gross income, unless he obtains $20,000 from another source and transfers it to the IRA by March 11, 2009 (within 60 days of receiving the distribution). In addition, if E fails to transfer the additional $20,000 to an IRA, E will be liable for the ten-percent early withdrawal penalty on the $20,000 because E was under age 55 (the minimum age for receiving penalty-free distributions upon a separation from service).