RMD from PSP that includes after tax contributions

[smm]

Participant is a 5% owner and must take his first RMD by 4/1/05. About 2% of his AB consists of after-tax contributions and earnings thereon. How is the distribution treated? Can he take 100% of the after tax contributions first as part of his first distribution? Does he take a pro-rata share? I haven't researched this yet and will, but any thoughts will be appreciated. Thanks.

[jevd]

The distribution is a prorata share of taxable and non-taxable amounts.

[smm]

I just began to look into this issue and that answer does not appear to be correct. It looks like you have to use the simplified method under Section 72(d) to determine the amount that is recovered tax free. The divosor under 72(d) is 160 monthly payments for a 70 year old, which is an annual divisor of 13.3. Of each MRD, the total of the after-tax contributions divided by 13.3 would be tax free. Does this sound correct to anyone?????????????????????????

[Guest Harry O]

What kind of plan is it? Did the plan separately account for after-tax contributions made before May 1986? If so, you can take out these contributions first which could "cover" a large portion of your first MRD.

[Bird]

Harry O is right; if these are pre-May 5, 1986 contributions, and the plan permitted their withdrawal before separation from service, then they are recovered up front. See Pub 575 page 14.

If that's not the case, then you recover pro-rata as noted by jevd. That is, you take the ratio of the after-tax contributions (without earnings!) to the total account balance and apply that to your calc'd RMD. smm, I don't think this is a case where you use the simplified method.

[smm]

Thank you for your comments. The plan is a profit sharing plan for a medical corporation. I do not have a copy of the plan, nor do I represent the group but will ask for copies of the documents. I do know that the after-tax contributions are accounted for seperately. It seems to me that the issue is whether minimum distributions are "periodic payments" for purposes of Section 72. If so, then it would seem that the taxation is governed by the simplified method even though they are not a true annuity. If they are not deemed to be "periodic payments" then then are governed by the pro-rate method, described above. I will check on when they were made and what the plan said.

[smm]

I was wrong and you (all 3 of the other contributors to the thread) are correct. PLRs 200117045 and 200117044 confirm the analysis and result. Thanks for your help!