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  • Home>Practice Management>Retiring With Natalie Choate>Late Retirement and Minimum Distributions

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    Late Retirement and Minimum Distributions

    The IRS offers a frustrating lack of guidance on how to tell whether someone is 'retired.'

    Natalie Choate, 06/09/2011

    The reviews are in for the new edition of Natalie Choate's best-selling book Life and Death Planning for Retirement Benefits (7th ed. 2011): "Your book has been a tremendously valuable resource to our firm." "I have found this book extremely helpful." "We have read and used it in many cases already." "I love the 7th edition!" "It's paid for itself already by answering several questions." "I ordered these for our company last week, and everyone loves it!" "GREAT BOOK!" To find out why your colleagues (and competitors!) are raving about the new edition of Life and Death Planning for Retirement Benefits, visit www.ataxplan.com.

    Late Retirement and Minimum Distributions
    Certain people who are still working after age 70 1/2 get to postpone the "required beginning date" for required distributions from their retirement plans. What can be frustrating is the lack of IRS guidance about how to tell whether someone is "retired."

    Question: "Joe" is leaving his job this year, at age 79. He does not now own and has never owned any stock of the corporation he works for. When must he start taking distributions from the company's retirement plan? If he goes back to work for this company later, can he suspend taking those minimum distributions until he retires again?

    Answer: Because Joe has never had any ownership interest in the employer, it's easy to figure out when he must start taking distributions. His "required beginning date" for distributions from his employer's retirement plan(s) is April 1 of the year following the later of the year he reaches/reached age 70 1/2 and the year he "retires." He reached age 70 1/2 several years ago, so the "later of" year is this year, the year he retires. Accordingly, 2011 is his "first distribution year," and he can take that first year's minimum required distribution anytime in 2011, or in 2012 (on or before April 1).

    If he owned an interest in the employer (now or in the past), we would have to take more steps to verify that he would not be considered a "5-percent owner." A 5-percent owner, unlike other employees, is not entitled to postpone the start of minimum distributions past age 70 1/2, regardless of whether he is "retired."

    Unfortunately, the plan apparently cannot suspend minimum distributions if he goes back to work for the company. The statute and regulations key the start of minimum distributions to the year the employee "retires," and there's no mention of any way to stop minimum distributions once they start. If Joe rolled his company plan benefits into an IRA, then went back to work for a different company, and rolled the IRA into his new employer's plan, that might do the trick--because he would not yet be "retired" under the new company's plan!

    Question: "Chris" is receiving deferred compensation from the company he used to work for. He is not and never has been a "5-percent owner" of that company. He is completely retired as far as I can tell, but he would like to postpone taking any minimum required distributions from the company's qualified retirement plan. He thinks he is entitled to such postponement because the nonqualified deferred compensation he is receiving is reported to the IRS on Form W-2. Because Form W-2 is reporting his income to the IRS as "wages" (W-2 is the "Wage and Tax Statement" form), he says the IRS would not regard him as "retired," therefore he is not subject to minimum required distributions yet. Is his argument valid?

    Answer: "Chris" is not going to be making this decision all by himself. The plan administrator of the company retirement plan and the person who prepares Chris' federal income tax return both also have a stake in getting the right answer here.

    Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.

    The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.