section 1 - The American College Online Learning Center

. Does the distribution election fit into the client’s retirement income plan?c. Are the technical requirements of the rollover rules satisfied?d. Consider reasons to take into income instead of rolling over.LO 4-1-2: Understand and advise clients on the tax treatment oftax-advantaged retirement distributions1. Framing the Issuea. The tax treatment of withdrawals affects almost everyone, as almost all clientshave some type of tax-advantaged retirement plan.b. It comes up a lot; the tax treatment of a withdrawal occurs each time there is adistribution from a qualified plan, IRA or other tax-advantaged plan.c. It is an integral part of the plan; clients live on after-tax income, so minimizingtaxes can have a significant effect on the retirement income plan.d. It can set the advisor apart; your introduction to the client may be around adecision they have to make around a distribution from a retirement plan. Being anexpert in this area gives the advisor a competitive edge.2. Key take-aways:a. Describe the general rules that apply to the tax treatment of a distribution.b. Identify the various complicating factors.c. Provide a checklist to use to help identify tax issues with each distribution.d. Note that this is a complex area and will be covered in more detail later in theRICP designation.3. Tax-deductible plansa. Qualified plans(1) Defined-benefit plans(2) Profit sharing plans(3) 401(k) plansb. Traditional IRAs(1) Deductible contribution account(2) Nondeductible contribution account(3) Rollover amountsc. 403(b) and government 457(b) plansd. Roth accounts (401(k), 403(b), government 457(b))4. General tax treatment from tax-deductible plans:a. Distributions from a qualified plan, deductible IRA, rollover IRA, non-Roth 403(b)and non-Roth 457 plan are taxed as ordinary income.b. Other after-tax amounts (cost basis) can be recovered tax-free.c. Lump sum distributions from qualified plans that include distributions of theemployer’s stock will be eligible for special tax treatment called “net unrealizedappreciation.”d. A death beneficiary may get a deduction for estate taxes paid.(1) This is the case only if federal estate taxes are paid based on the pensionbenefits.4.6