Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

first-time homebuyer distribution, does NOT apply to DRACs; compare ¶ 5.2.04 , #4. § 402A(d)(2)(A) .

B. How the Five-Year Period is computed for a DRAC. As with Roth IRAs, DRACs have a five-year waiting period (called the “nonexclusion period” in the statute, the “Five-Year Period” in this book) before a qualified distribution can occur. § 402A(d)(2)(B) . However, there is a difference in the way the Five-Year Period is calculated. With a Roth IRA, the Five-Year Period begins with the first year there is a contribution to any Roth IRA; see ¶ 5.2.05 . For a DRAC, in contrast, the Five-Year Period is five consecutive years beginning with the first year the employee made a contribution to a DRAC in that particular plan ( i.e., the year the elective deferral was included in his income). § 402A(d)(2)(B)(i) . If the employee takes distribution of the entire account during the Five-Year Period then later makes more contributions, the start of the Five-Year Period is not “redetermined”; it still begins with the first contribution. Reg. § 1.402A-1 , A-4(c). The Five-Year Period is computed plan-by-plan even for two plans maintained by the same employer. Reg. § 1.402A-1 , A-4(a), (b). For the only exception to this rule (applicable to certain rollover amounts), see ¶ 5.7.07 (D). However, certain DRAC contributions do NOT start the Five-Year Period tolling. “A contribution that is returned as an excess deferral or excess contribution does not begin the 5 taxable-year period of participation. Similarly, a contribution returned as a permissible withdrawal under section 414(w) does not begin the 5 taxable-year period of participation.” Reg. § 1.402A-1 , A-4(a). ( § 414(w) came into effect in 2008, allowing for “eligible automatic contribution arrangements.”) This rule avoids game-playing: The participant cannot start the five-year clock running with a contribution that is returned to him. Once the Five-Year Period has elapsed, and the triggering event requirement is met, subsequent distributions are generally qualified; for exceptions, see “C.” Qualified status is determined based on the year in which the distribution actually occurs, not on some prior year to which it may relate. For example, a distribution received after completion of the Five-Year Period (and after a triggering event) is a qualified distribution, even if it is part of a series of substantially equal periodic payments that started prior to the completion of the Five- Year Period. T.D. 9324, “Preamble,” “Determination of 5-Taxable-Year Period for Qualified Distributions.” For how to compute the Five-Year Period with respect to a reemployed veteran , see Reg. § 1.402A-1 , A-4(e). C. List of never-qualified distributions. Certain DRAC distributions can not be qualified distributions, even if the Five-Year Period and triggering event requirements are met. Reg. § 1.402A-1 , A-2(c), A-11. These never-qualified distributions are listed by cross-reference to Reg. § 1.402(c)-2 , A-4:

 Corrective distributions of excess plan contributions (including income thereon) made by the plan in order to comply with the § 415 limits. A-4(a).