Rollover IRA Distributions

 A normal rollover IRA distribution occurs after the actual date, not simply the calendar year, you attain age 59½. For example, William was born on February 15, 1954. He will be 59½ on August 15, 2013. A distribution before that date would be called premature (see below).

All distributions are taxable, unless aftertax contributions were made, but there is no 10% penalty tax. If aftertax contributions were made to any IRA you owned, a pro-rata formula would apply to each distribution allocating tax-free return of contributions and taxable gains and/or contributions regardless whether the distribution comes from any one or several IRAs.

A premature rollover IRA distribution, without an exception, occurs when you remove funds before age 59½ and none of the statutory exceptions apply (see next Q&A), so that a 10% penalty is assessed against any taxable amounts withdrawn in addition to any taxes due.

A premature rollover IRA distribution with an exception occurs under any of the following circumstances:

• Substantially equal periodic payments are taken based on your life expectancy. (This is frequently called a 72(t) distribution because of the section of the Internal Revenue Code where the penalty and exception reside.) Payments must be made for the greater of five years or you attaining age 59½, or the 10% penalty reattaches (retroactively) to all distributions made before age 59½.
• You are disabled.
• You are the beneficiary of a deceased IRA owner.
• You are using distributions to pay qualified higher education expenses (tuition, fees, books, supplies, etc.) for yourself or a family member, such as a son or daughter.
• You are paying health insurance premiums after you have received unemployment compensation for more than 12 weeks.
• You have significant, unreimbursed medical expenses (greater than 7.5% of adjusted growth income [AGI]¹ for that year). Individuals 65 and over can use the lower 7.5% threshold through 2016.
• Your distribution is used to buy, build, or rebuild a first home. (There is a lifetime limit of $10,000 for distributions for first-time homebuyers, so if you wanted to assist two children equally to buy a home, each child could receive $5,000. If your spouse also had an IRA, he/she could also do the same for each child in this example.)
• Your distribution is due to an IRS levy to pay overdue taxes.

¹ Adjusted Gross Income includes wages, interest, capital gains, income from retirement accounts and alimony paid to the taxpayer adjusted downward by specific deductions (including contributions to deductible retirement accounts and alimony paid by the taxpayer); but not including standard and itemized deductions.

You must begin receiving required minimum distributions (RMDs) by April 1 of the calendar year following the calendar year you attain age 70½ and continue to receive the RMD before each subsequent December 31. Two distributions will be required in the first year if you wait until the calendar year following 70½ to commence RMDs. To avoid taking two RMDs in the same year, you would take the first RMD by December 31 of the year you turn 70½.

RMDs, which represent pretax dollars and all earnings, are taxed as ordinary income. The portion of RMDs based on non-deductible contributions, if any, is tax-free. All distributions must include both taxable and nontaxable funds (if any) based on a pro-rata formula provided by the IRS. You are subject to this rule if any of your IRAs were funded with aftertax dollars. All RMD calculations treat you as owning one big IRA from which a pro-rata share of aftertax dollars, if any, must be withdrawn. If you are affected by this issue, please use IRS Form 8606 to report the split. Earnings are always taxable.

If the full RMD is not taken in a given year, a 50% excess tax is assessed on the amount not taken. For example, if you were required to take $10,000, but only took $6,000, a 50% excise tax could be assessed against the $4,000 shortfall in addition to income taxes due.

When an IRA account owner dies, generally an inherited IRA (that is, a decedent or beneficial IRA) is created. However, the treatment of the inherited IRA account varies depending on who is the beneficiary. IRAs that are inherited from a spouse may be treated differently than IRAs that are inherited from someone other than a spouse.

Inherited from spouse:

If the IRA is inherited from someone other than a spouse, the options are more limited. If this is the case, you may leave the account where it is or make a trustee-to-trustee transfer (to change investment vehicle from one IRA trustee directly to another), as long as the IRA (called a "decedent IRA" or "inherited IRA") is established in the name of the deceased owner for the benefit of the beneficiary (you). For example, the account might be titled as follows: "Joe Doe, deceased, F/B/O Jane Doe, beneficiary."

A non-spouse beneficiary has the option to:

A Stretch IRA is for investors who will not need their IRA money during their own retirement. While the law does not restrict which taxpayers can select the stretch IRA option, the stretch strategy is appropriate only for those individuals who simply need and plan to receive the required minimum withdrawals, taken at the latest time the law allows, without penalty, age 70½.

A Stretch IRA can be described as a distribution strategy for an individual IRA's beneficiary. The objective upon your death is to S-T-R-E-T-C-H the beneficiary's payments over a lengthy period of time in order to obtain favorable economic and/or tax results. Payment projections over 30 years or more are not uncommon. The beneficiary is usually your child or a grandchild, but may be anyone you choose. There can be no guarantee, however, that the second- and third-generation beneficiaries will continue the stretch strategy and could elect to liquidate the account at any time.

Someone may want to S-T-R-E-T-C-H their distributions because money in an IRA grows tax-deferred.¹ The beneficiary effectively inherits a tax-deferred¹ savings account. By spreading the payments over a significant number of years, tax-deferred¹ compounding continues, and taxes on the payments may be minimized or at least disbursed over many years.

The regulations prohibit death distributions to extend beyond the period of the initial non-spouse beneficiary's life expectancy, not recalculated as they age.

Example: Martha dies and her daughter Angela is the beneficiary of her IRA. Angela is 50 years old and her life expectancy is 34 years. In other words, Angela would need to withdraw 1/34, 1/33, 1/32, etc., of the account beginning on or before December 31 of the year following Martha's death.

If Angela dies five years later at age 55 and Angela's beneficiary is her son Bob, Bob can continue taking distributions based on Angela’s reduced life expectancy (34-5= 29). If Bob were to pass away before the 29 years were over, he could pass on the IRA to his beneficiary until the original life expectancy of Angela goes down to one, when the remaining balance would be fully distributed.

Unless restricted by the terms of the beneficiary designation, Angela and, subsequently, Bob, in this example, could accelerate their payments (take more than the minimum), which could lower the ultimate amount and length of the distributions.

If Martha did not name a beneficiary, the IRA assets may have passed on to her estate, with accelerated distributions being required. Some custodial account agreements may establish a beneficiary ordering rule, such as spouse, children, parents, etc., which could determine the actual beneficiary in the event the account owner did not have a named beneficiary upon death. A Lord Abbett IRA has the estate as a default beneficiary if a beneficiary is not named.

It is also important to note that IRAs cannot be transferred via an account owner's will, unless the will had been named, prior to death, as the beneficiary or contingent beneficiary of the account and accepted by the custodian.

¹ Income whose taxes can be postponed until a later date; examples include IRAs and 401(k) plan earnings.

Risks Involving the Stretch IRA Strategy
Withdrawals by the account holder or beneficiaries in excess of the required minimum distribution (RMD) will exhaust the account at a faster pace, reducing or eliminating the effectiveness of the stretch strategy. Distributions greater than the RMD could subject the payments to higher federal and, possibly, state income taxes. When investing assets, which will be used to Stretch IRA payments, the investor must be cognizant of any front-end or back-end sales charges that can reduce the assets available. During an extended period of declining investment returns, investors will experience income fluctuations that may cause additional withdrawals to be made that will exhaust the account at a more rapid rate. There can be no guarantee that a Stretch IRA strategy will be advantageous to your specific situation, and many of its benefits are based on current tax laws, which are subject to change. If these laws change, an investor’s ability to maintain estimated distributions may be affected. Lengthy distribution periods, much like those involved in a Stretch IRA, expose an investor to significant market risk.

Once in a 12-month period, measured from the date you first access your IRA funds, you may withdraw an amount from each of your IRAs and use it for whatever reason and return it within 60 days, as though the withdrawal never occurred.

Example: Barbara withdraws $30,000 from her IRA on March 1, 2012. If she returns the $30,000, or a lesser amount, by April 30, 2012, she has had use of the money and avoided any taxes or penalties on the amount returned. She cannot make another withdrawal, with the ability to return it, until March 2, 2013.
If Barbara had another IRA (or several including SEPs¹ and SIMPLE IRAs²), she could make this 60-day withdrawal from each of them, at different times, use the funds as she wishes, and return them within the 60-day period.

Withdrawing funds from one IRA and repaying it to another IRA connects the second IRA to the first IRA for purposes of the 60-day rule. If Barbara had two IRAs and withdrew from one, but repaid the other on a timely basis, she would lose the ability to make a separate 60-day withdrawal/return from the second IRA until March 2, 2013, in this example.

Important Tip
You must recognize there can be significant taxes and penalties if the funds are not repaid, and larger withdrawals may be more difficult to repay.
A rollover cannot be repaid to a SIMPLE IRA unless the funds were withdrawn from a SIMPLE IRA, but SIMPLE IRA assets, if the SIMPLE IRA were at least two years old, could be returned to any IRA.

¹ A Simplified Employee Pension Plan, commonly known as a SEP-IRA, is a retirement plan specifically designed for self-employed people and small business owners. When establishing a SEP-IRA plan for a business, the owner and any eligible employees establish their own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP-IRA.
² A SIMPLE IRA plan is an IRA-based plan that gives small business employers a simplified method to make contributions toward their employee’s retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to a SIMPLE Individual Retirement Account set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

We have a full description of what's involved when you decide to convert a traditional IRA to a Roth IRA. Please click here, Roth Conversion Resource Center, for full details.

Please note: An IRA may involve the application of fees and charges to the investor.

Lord Abbett will waive (or otherwise pay) the  yearly $10.00 custodial fee that would be charged each year on an ongoing basis  to every new IRA account and, therefore, will not assess a custodial account  fee effective in 2013 or any year afterward. Fund level fees and expenses are still  applicable.  Please see the current prospectus.