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The IRA Distribution ManualA Guide to Receiving Distributions From Your IRA

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THE IRA DISTRIBUTION MANUAL

MORGAN STANLEY | 2016

Introduction � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 3

Traditional IRAs and SIMPLE IRAs � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 4

Required Minimum Distributions (RMDs) at Age 70½ for Traditional IRAs and SIMPLE IRAs � � � � 6

Required Minimum Distributions (RMDs) for Traditional IRAs and SIMPLE IRAs Due to Death � � 8

Conversions From Traditional IRAs to Roth IRAs � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 14

Roth IRAs � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 16

Choosing an IRA Beneficiary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 20

Qualified Charitable Distributions (QCDs) � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 24

Substantially Equal Periodic Payments — 72(t) Payments � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 26

IRA Rollovers � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 28

Distributions to Non-Resident Aliens � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 30

Internal Revenue Service (IRS) Forms � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 31

Attachment A1 — Understanding IRS Form 1099-R � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 33

Attachment A2 — Understanding IRS Form 5498 � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 36

Attachment B — State Tax Withholding � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �40

Attachment C — Life Event Exceptions � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 41

Attachment D — Distributions at a Glance � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 42

Attachment E — Distribution Rules � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 43

Attachment F — RMD Rules � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �44

Attachment G — Rollover Chart � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 45

Life Expectancy Tables� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � �46

Glossary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 50

Contents

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One of the most effective ways for you to build and manage your funds to help meet your financial goals is through an Individual Retirement Account (IRA). IRAs can put you in control of your retirement, whether you are saving for your future retirement, currently retired — or somewhere in between.

Every IRA account will eventually have distributions, either to realize a goal, pay out a retirement benefit, or to play a role in planning your estate. Because IRAs are governed by specific rules that determine if a distribution is subject to ordinary income tax and/or a penalty tax, an individual’s IRA must be given the proper attention for effective and efficient planning. You need to be aware of the options now available to you and how each of these options will affect the amount of tax you will pay and when you will pay it. Tax on the assets and investment earnings remaining in the IRA will generally continue to be deferred until distributions are made.

Structuring a distribution strategy that best meets your income needs, while keeping in mind the future needs of your spouse or other beneficiaries, requires some thoughtful advance planning. Morgan Stanley has produced this manual to make you aware of the numerous interrelated issues that could

impact your decisions. Please take some time to read carefully the sections that are pertinent to you. Since regulations governing IRA distributions are complex and change from time to time, you will undoubtedly want to solicit your tax and legal advisors’ opinions on these matters as well.

Of course, it is impossible for a manual to cover every situation. For specific questions and guidance, feel free to ask your Financial Advisor or Private Wealth Advisor about a financial planning analysis to help you in the decision-making process.

This document is for informational purposes only and should not be construed as tax or legal advice. This document does not reflect the impact of state and local income taxes. The state and local income tax treatment of your retirement account and the distributions from it may vary based on your state of residence. You should consult with and rely on your own independent tax advisor with respect to such.

TO DETERMINE IF TAXES AND/OR A PENALTY TAX WOULD APPLY, THESE FOUR QUESTIONS MUST BE ANSWERED:

Introduction

What type of IRA do you own? 1

2

3

What is your age at the time of distribution?

What is the reason for the distribution?

Do you have any after-tax contributions in your IRA?4

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Traditional IRAs and SIMPLE IRAsTraditional IRAs include: Spousal, Rollover, SEP and SAR-SEP

In addition, withdrawals may be partially or totally subject to ordinary income taxes depending on the type of contributions in your Traditional IRA. Deductible IRA Contributions and all IRA earnings are taxed as ordinary income upon distribution. Nondeductible contributions will not be taxed. However, for purposes of determining the taxable portion of a particular distribution, before- and after-tax contributions are treated as distributed on a proportionate basis. Therefore, you must take into account all your non-Roth IRAs (other than inherited IRAs) when calculating the taxable and nontaxable portion of your IRA distributions. Please read “How Do I Calculate the Taxable Portion of My Traditional or SIMPLE IRA Distribution for a Conversion to a Roth IRA” on page 15 of this manual.

PENALTY TAX FREE DISTRIBUTIONSIRA assets may be distributed before age 59½, without the 10 percent premature distribution penalty tax, if the proceeds are used for one of the following Life Event Exceptions:

• Made when the IRA owner is age 59½ or over

• Used for qualifying first-time homebuyer expenses for yourself, your spouse, your children, grandchildren and parents or grandparents of you or your spouse ($10,000 lifetime limit).

• Used for qualified higher education expenses1 incurred by the IRA holder or certain family members.

• Distributed to beneficiaries on IRA holder’s death.

While the primary purpose of an IRA is to accumulate and conserve your assets for retirement, the realities of modern life sometimes run counter to the typical definition of “retirement years.” So while the tax laws discourage distributions before age 59½ by imposing an additional 10 percent penalty tax on early withdrawals, the laws also recognize an increasing number of penalty tax-free exceptions. Note: If a SIMPLE IRA owner distributes assets from his or her SIMPLE IRA before having participated in the plan for at least two years, the premature distribution penalty tax will be 25 percent, unless one of the life event exceptions applies.

1 The term “qualified higher education expenses” includes tuition, fees, books, supplies and equipment for the attendance of a student at any eligible education institution, as well as room and board, if the individual is at least a half-time student (subject to certain limits). Qualified higher education expenses include expenses relating to undergraduate or graduate-level courses.

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• Used to cover unreimbursed medical expenses exceeding 10 percent of Adjusted Gross Income. The medical expenses must be the type of medical expense that could be included as an itemized deduction on your tax return.

• Used to purchase medical insurance after receiving unemployment compensation for more than 12 consecutive weeks (subject to certain conditions).

• Due to a qualifying disability. You are considered disabled, as defined in IRC Section 72(m)(7), if you cannot work due to a physical or mental condition that is considered by your physician to be expected to result in death or to be of a long and indefinite duration.

• Made under a qualifying Substantially Equal Periodic Payments schedule under Section 72(t)(2)(A)(iv) of the Internal Revenue Code. This method of distribution is discussed on page 26 of the manual.

• A qualified reservist distribution.• A qualified disaster distribution.• Made pursuant to a qualifying

IRS levy.

DISTRIBUTIONS ON OR AFTER THE IRA OWNER REACHES AGE 59½ (NORMAL DISTRIBUTIONS)The taxable portion of your distribution will generally be subject to ordinary income tax, but your distributions are IRS penalty tax-free and can be made for any reason. However, if you modify a Substantially Equal Periodic Payments (72(t) payment) schedule prior to the required end date, the taxable portion of the payments you received prior to

reaching age 59½ will be retroactively subject to the 10% penalty tax, plus interest for the scheduled payment period.

For SIMPLE IRAs, there is a mandatory 25% premature distribution penalty tax if a distribution is made within the first two years of participation except if distributed on account of death, disability, or if paid in substantially equal installment payments (72(t) distributions). The penalty rate is reduced to 10 percent after the first two years.

FEDERAL INCOME TAX WITHHOLDINGIn general, all IRA custodians must withhold federal income tax at the minimum rate of 10 percent from each distribution made from your IRA, unless you elect in writing not to have such amount withheld (once income taxes are withheld and distributed from the account, the transaction cannot be reversed and funds put back into the account). You are liable for payment of federal income tax on your IRA distributions. This tax withholding is a prepayment of the tax liability and is in addition to the payment of a 10 percent premature distribution penalty tax, if applicable. You also may be subject to tax penalties under estimated tax payment rules if your payment of your estimated tax and withholding, if any, are not adequate to cover the income tax. If you elect to have federal income tax withheld, your state of legal residence may also require state income tax to be withheld (see state withholding information in Attachment B). Refer to

your state regulations and consult with your tax advisor for further information and explanation of your requirements.

The federal tax law does not allow a U.S. citizen or resident alien to waive withholding on any distribution delivered outside of the U.S. or its possessions or territories. Moreover, absent a properly claimed exemption or reduced rate of withholding under an applicable U.S. income tax treaty, distributions to a nonresident alien are generally subject to a federal income tax withholding rate of 30 percent. It is important that you consult with your tax advisor if you are claiming NRA status.

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However, the first such distribution for the first Distribution Calendar Year may be delayed until April 1 of the year following the year in which the individual attains age 70½. This date is referred to as the Required Beginning Date (RBD). After the first Distribution Calendar Year, RMDs must be taken by December 31 of each year.

If you decide to delay your first RMD until the RBD (April 1 of the year after the first Distribution Calendar Year), then you will have two distributions in one tax year. For example: If you attain age 70½ in 2016 you must withdraw the 2016 RMD by April 1, 2017, and the 2017 RMD by December 31, 2017.

Thereafter, for each Distribution Calendar Year in which you have not exhausted your IRA account, you must take an RMD by December 31.

Morgan Stanley, as the IRA custodian, calculates the RMD amount for you using the IRS Uniform Life Expectancy Table, unless you instruct us to use the IRS Joint Life and Last Survivor Expectancy Table and you are eligible to use such (i.e., your sole primary beneficiary is your spouse who is more than 10 years younger than you). Morgan Stanley displays the RMD information on your quarterly statement page. The information on calculating RMDs below is for your information only.

The amount of the RMD for any Distribution Calendar Year is determined by taking your IRA account balance as of the end of the prior year (December 31 value), and dividing it by the life expectancy factor (Life Expectancy Tables are provided at the end of this manual) that is based on your attained age at the current year-end.

Required Minimum Distributions (RMDs) at Age 70½ for Traditional IRAs and SIMPLE IRAsThe IRS requires that individuals must start distributing amounts from their Traditional IRA account(s) in the year they become age 70½ and in subsequent years. These distributions are referred to as Required Minimum Distributions (RMDs). This requirement applies to all Traditional IRAs, which include Spousal, Rollover, SEP, SAR-SEP and SIMPLE IRA accounts�

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IMPORTANT RMD CONSIDERATIONS• Failure to take the RMD may subject

you to an excise penalty tax of 50 percent of the amount that should have been distributed, but was not. The IRS can waive part or all of this tax if you can show (on IRS Form 5329) that the RMD was not made due to “reasonable error,” and the taxpayer took “reasonable steps” to remedy the situation. If you should find yourself in this situation, you should consult with your tax and legal advisor.

• These distributions are merely annual minimums; greater amounts may be taken each year.

• Each year stands on its own. If more than the RMD is distributed in one year, the excess cannot be used to offset the next year’s minimum.

• The RMD must be calculated separately for each IRA account. The aggregate of all such amounts generally may be distributed from any one or more IRA accounts (other than Roth and Inherited IRAs), regardless of whether the IRAs are established with the same Custodian.

• If you maintain(ed) a qualified retirement plan with an employer or a former employer, the RMD must be calculated and distributed directly from each plan.

• If there are multiple primary beneficiaries on one IRA account, then the Uniform Life Expectancy Table must be used.

• Changing a beneficiary after the RBD generally will not change the RMD amount. The exception is if the IRA owner makes his or her spouse, who is greater than 10 years younger than the IRA owner, the sole primary beneficiary, for the entire Distribution Calendar Year. In this case, the IRA owner could use the Joint Life Expectancy Table.

• If the IRA owner dies on or after the RBD (April 1 of the year following the year the IRA owner turned age 70½), the RMD for the year of death, if not already taken, must still be paid out by December 31 of that year. The RMD for the year of death is calculated as if the IRA owner lived for the entire year, and is paid out to the beneficiary(ies).

Frequency of Distributions:Distributions may be taken more frequently than just once per year. Morgan Stanley also offers a service, at no additional cost to you, which will automatically process your distribution based on the frequency option you wish to select. You can choose to deposit your payment into another Morgan Stanley account, receive a check or deposit to another bank. Enrolling in our Auto RMD program should help you avoid having the 50 percent excise penalty tax imposed by the IRS for failure to take your RMD. If you are interested in finding out how to get started, you can contact your Financial Advisor or Private Wealth Advisor.

THE REQUIRED MINIMUM DISTRIBUTION FORMULA

December 31 Prior-Year Balance ÷ Life

Expectancy Factor

Required Minimum

Distribution (RMD)

=

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Morgan Stanley, as the IRA custodian, is not required to calculate the RMD amount due to the IRA owner’s death, for Inherited IRAs.

As a customer service offering, if we have the necessary personal information on file and you have selected an available distribution option, we can automatically calculate an estimated RMD amount, and display the RMD information on your quarterly statement page. Please note that for Inherited IRAs, RMDs due to death are sometimes referred to as Required Death Distributions (“RDDs”).

DISTRIBUTIONS TO A BENEFICIARY:Morgan Stanley permits an individual to designate primary and contingent beneficiaries. If the IRA owner dies, the IRA assets will pass to the primary beneficiary, provided that the primary beneficiary survives the IRA owner and does not timely “disclaim” the right to the assets. If the primary beneficiary does not survive the IRA owner, or disclaims the IRA, the IRA assets will pass to the contingent beneficiary, if any. If the contingent beneficiary does not survive the IRA owner’s death either, or disclaims, then the assets will pass as if no beneficiary designation were made and will default to (a) spouse, (b) if no spouse, to any surviving children (naturally born or legally adopted) in equal shares, (c) if no children, then to the surviving parent(s) in equal shares or all to the surviving parent, and (d) if no parents, then to the IRA owner’s estate.

Beneficiary designations must be supplied, in writing, to Morgan Stanley in an acceptable form. This designation will determine who will receive the IRA assets when the IRA owner passes away, not the

Required Minimum Distributions (RMDs) for Traditional IRAs and SIMPLE IRAs Due to DeathRequired Minimum Distributions Due to Death:The designated beneficiary(ies) of an IRA is also subject to Required Minimum Distribution (RMD) rules when the IRA owner passes away. Failure to take the RMD may subject the beneficiary(ies) to an excise penalty tax of 50 percent of the amount that should have been distributed, but was not. Each Traditional and SIMPLE IRA account stands on its own for purposes of determining post-death RMDs.

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IRA owner’s will. Your Financial Advisor/Private Wealth Advisor can provide you with a copy of the “IRA Designation of Beneficiary” Form if you wish to name or update your beneficiaries.

If there are multiple beneficiaries, each beneficiary’s interest in the IRA should be transferred into a separate Inherited IRA established for such beneficiary by December 31 of the year following the

year of the IRA owner’s death to preserve the options available for distribution (allowing for life expectancy distributions based on such beneficiary’s date of birth in the year following the year of death).

Distribution Options for a Spouse Beneficiary

The designated spouse beneficiary of a deceased IRA Owner’s Traditional or SIMPLE IRA has the following distribution options when the IRA owner dies before reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½).

1 Transfer the IRA into the surviving spouse’s existing or new IRA.

2 Withdraw all assets either in a “lump sum” or in installments by the end of the fifth year following the year of death of the IRA participant.

3 If spouse is the sole beneficiary, distribute based on the single life expectancy of the spouse. Distributions must begin by the end of the year (December 31) following the year of death of the IRA owner, or the year the IRA owner would have been 70½ years old, whichever is later.

4Elect to treat the decedent’s account as the surviving spouse’s own IRA but only if the spouse is the sole designated beneficiary and has an unlimited right of withdrawal. The surviving spouse is automatically deemed to have made this election if the spouse either makes a contribution to the account or fails to take RMDs as a beneficiary.

The designated spouse beneficiary of a deceased IRA Owner’s IRA has the following distribution options when the IRA owner dies on or after reaching the RBD.

1 Transfer the IRA into the surviving spouse’s existing or new IRA.

2 Spouse is the sole beneficiary, distribute based on longer of (a) the single life expectancy of the spouse, recalculated each year after the year of the IRA owner’s death, or (b) the single life expectancy of the deceased IRA owner, using the non-recalculation method (term-certain method).

3 Withdraw all assets in a “lump sum” payment (note, however, the lump sum payment must be made before the end of the year following the year of IRA owner’s death, otherwise the beneficiary will need to satisfy the annual RMD for each year the assets remain in the IRA).

NOTE: The undistributed portion of the IRA owner’s year of death RMD (if any) must be taken by the beneficiary(ies).If the surviving spouse is under age 59½, the spouse should consider keeping the IRA in the decedent’s name as a beneficiary IRA. This is of particular importance if the spouse will need distributions before age 59½. By keeping the assets in the beneficiary IRA, any distribution may be subject to income tax but not the 10 percent penalty tax. When the surviving spouse reaches age 59½, the IRA can be rolled over into the surviving spouse’s own IRA. If the surviving spouse rolled over the IRA and then needed a distribution before age 59½, the 10 percent penalty tax would be imposed unless another exemption applies.

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Distribution Options for a Non-Spouse Beneficiary

The designated non-spouse beneficiary (one individual beneficiary) of a deceased IRA Owner’s IRA has the following distribution options when the IRA owner dies before reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½).

1Distribute based on the single life expectancy of the non-spouse beneficiary, using the nonrecalculation method (term-certain method). The distribution must begin by the end of the year (December 31) following the year of death of the IRA owner. The life expectancy factor should be determined by using the non-spouse beneficiary’s age in the year after the year of the IRA owner’s death.

2 Withdraw all assets either in a “lump sum” or in installments by the end of the fifth full year following the year of death of the IRA owner.

The designated non-spouse beneficiary (one individual beneficiary) of a deceased IRA Owner’s IRA has the following distribution options when the IRA owner dies on or after reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½).

1Distribute based on the longer of (a) the single life expectancy of the non-spouse beneficiary, using the non-recalculation method (term-certain method), or (b) the single life expectancy of the deceased IRA owner, using the non-recalculation method (term-certain method). The distribution must begin by the end of the year (December 31) following the year of death of the IRA owner. The life expectancy factor of the non-spouse beneficiary should be determined by using the non-spouse beneficiary’s age in the year after the year of the IRA owner’s death. The life expectancy of the deceased IRA owner is determined by using the deceased IRA owner’s age in the year of death.

2 Withdraw all assets in a “lump sum” payment (note, however, the lump sum payment must be made before the end of the year following the year of IRA owner’s death, otherwise the beneficiary will need to satisfy the annual RMD for each year the assets remain in the IRA).

NOTE: The undistributed portion of the IRA owner’s year of death RMD (if any) must be taken by the beneficiary(ies).

The following distribution options are available if there are multiple beneficiaries, the IRA account has not been divided into separate accounts by December 31 of the year following the IRA owner’s death and the IRA owner dies before reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½).

1Distribute based on the single life expectancy of the oldest designated beneficiary, using the non-recalculation (term-certain) method. The life expectancy factor is determined using the oldest designated beneficiary’s age in the year after the year of the IRA’s owner’s death. Distribution must be made by the end of the year following the year of death of the IRA owner. This rule applies even if one of the beneficiaries listed is the IRA owner’s spouse.

2 Withdraw all assets either in a “lump sum” or in installments by the end of the fifth full year following the year of death of the IRA owner.


Distribution Options for Multiple Beneficiaries

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Distribution Options for Multiple Beneficiaries

If the beneficiary is a non-living entity or there are multiple beneficiaries containing at least one non-living entity, the IRA account is not separated into individual accounts by December 31 of the year following the year of the IRA owner’s death and the IRA owner dies before reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½), the assets must be distributed in:

1 A “lump sum”, or

2 Installments by the end of the fifth full year following the year of death of the IRA owner.

The following distribution options are available if there are multiple beneficiaries, the IRA account has not been divided into separate accounts by December 31 of the year following the IRA owner’s death and the IRA owner dies on or after reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½).

1Distribute based on the longer of (a) the single life expectancy of the oldest designated beneficiary, using the non-recalculation (term-certain method), or (b) the single life expectancy of the deceased IRA owner, using the non-recalculation method (term-certain method). The oldest beneficiary’s life expectancy factor is determined using the oldest designated beneficiary’s age in the year after the year of the IRA owner’s death. The life expectancy of the deceased IRA owner is determined by using the deceased IRA owner’s age in the year of death. Distribution must be made by the end of the year following the year of death of the IRA owner. This rule applies even if one of the beneficiaries listed is the IRA owner’s spouse.

2 Withdraw all assets either in a “lump sum” (note, however, the lump sum payment must be made before the end of the year following the year of IRA owner’s death, otherwise the beneficiary will need to satisfy the annual RMD for each year the assets remain in the IRA).


If the beneficiary is a non-living entity or there are multiple beneficiaries containing at least one non-living entity, the IRA account is not separated into individual accounts by December 31 of the year following the year of the IRA owner’s death and the IRA owner dies on or after reaching the RBD (April 1 of year after the IRA owner attained or would have attained age 70½), the assets must:

1Distribute based on the single life expectancy of the deceased IRA owner, using the non-recalculation method (term-certain method). The life expectancy of the deceased IRA owner is determined by using the deceased IRA owner’s age in the year of death. Distribution must be made by the end of the year following the year of death of the IRA owner. This rule applies even if one of the beneficiaries listed is the IRA owner’s spouse.

2Withdraw all assets either in a “lump sum” (note, however, the lump sum payment must be made before the end of the year following the year of the IRA owner’s death, otherwise the beneficiary will need to satisfy the annual RMD for each year the assets remain in the IRA).


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HOW TO DETERMINE THE REQUIRED MINIMUM DISTRIBUTION DUE TO DEATHThe beneficiary is responsible for calculating and withdrawing the RMD each year by December 31. Morgan Stanley may assist the beneficiary with calculating the RMD provided the beneficiary completes the Inherited IRA Distribution Option Form. The amount of the RMD, if distributing over a person’s life expectancy, is determined by taking the IRA account balance as of the end of the prior year (December 31 value), then dividing it by the applicable life expectancy factor (obtained from the IRS Single Life Expectancy Table for use by beneficiaries).

Important Points About Required Minimum Distributions

HOW TO DETERMINE THE LIFE EXPECTANCY FACTOR• Single, Recalculated Life Expectancy:

When the spouse beneficiary is eligible and chooses this option, the life expectancy factor is

determined annually using the spouse beneficiary’s age as of his or her birthday in each year for which the Required Minimum Distribution must be made and the single spouse is alive. The spouse beneficiary refers back to the IRS Single Life Expectancy Table each calendar year to obtain the new factor.

• Single, Non-Recalculated (Term-Certain) Method: A designated non-spouse beneficiary’s life expectancy is calculated using the age of the beneficiary in the year following the year of the IRA owner’s death, using the IRS Single Life Expectancy Table. The life expectancy factor is reduced by “one” for each subsequent year. The designated beneficiary does not refer back to the Single Life Expectancy Table annually. This method will also be used by remainder beneficiaries, but will be based on the life expectancy used by the original beneficiary (and not the remainder beneficiary’s life expectancy).

WHEN BENEFICIARIES ARE DETERMINEDFor the purposes of calculating post-death Required Minimum Distributions (RMDs), the designated beneficiary may be determined as late as September 30 following the year of the IRA owner’s death. The beneficiary may be changed after the IRA owner’s death only by one or more beneficiaries either timely and properly disclaiming their interests in the IRA, or taking total distributions of their shares of the IRA prior to September 30 following the year of the IRA owner’s death.

For example, an IRA owner named his spouse as his sole primary beneficiary and his three children as his contingent beneficiaries. When the IRA owner passed away, his spouse decided to disclaim her right to the IRA assets. If the primary beneficiary timely and properly disclaims the inheritance, this makes the contingent beneficiaries the new primary beneficiaries. One of the sons will fully distribute his allocation and the remaining two sons would be considered the designated beneficiaries of their father’s IRA.

THE REQUIRED DEATH DISTRIBUTION FORMULA

December 31 Prior-Year Balance ÷ Single Life

Expectancy Factor

Required Death

Distribution (RDD)

=

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If there are multiple beneficiaries, the IRA may be split into separate accounts by December 31 of the year after the year of the IRA owner’s death. In such case, the distribution of each account will be calculated separately for each beneficiary. To continue with our example, if the two sons divide the IRA into separate accounts by the December 31 deadline, each son will be able to use his own life expectancy to calculate the RMDs to be distributed from the IRA.

INHERITED IRAWhen an IRA owner passes away, the beneficiary may open an Inherited IRA. The beneficiary will take the Required Minimum Distributions from this type of account and it will be reported on IRS Form 1099-R, under the beneficiary’s Social Security Number.

• IRAs are included in the account owner’s taxable estate, but are generally excluded from probate.

• If the beneficiary decides to change the institution where the decedent’s IRA account is being held, a direct transfer can occur to move the decedent’s IRA from one institution to another, as long as the new institution accepts it. The IRA at the new institution should remain in the name of the decedent, for the benefit of the beneficiary. This transfer is not, by itself, a taxable event.

SPECIFIC FOR SPOUSE BENEFICIARY• If the spouse is the sole primary

beneficiary, the IRA may avoid federal estate taxes because it qualifies for the unlimited marital deduction.

• Only a surviving spouse has the option to roll the IRA into his or her name alone.

INCOME IN RESPECT OF A DECEDENT (IRD)One other important item to remember is that all or a portion of a distribution from a decedent’s IRA may qualify as Income in Respect of a Decedent or “IRD.” If the IRA owner’s estate paid estate taxes, then the percentage of those taxes attributable to the value of the IRA may be deducted by the beneficiary to offset income from an IRA distribution. The IRD rules are complex and we strongly recommend you consult with your tax and/or legal advisor.

If the primary beneficiary timely and properly disclaims the inheritance, this makes the contingent beneficiaries the new primary beneficiaries.

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The IRA owner is required to report the conversion on IRS Form 8606, Nondeductible IRAs, when filing their income tax return for the year of the conversion distribution.

RECHARACTERIZATIONS• You may wish, under certain

circumstances, to undo a Roth conversion (or recharacterize). A recharacterization is the movement (via a direct transfer) of a contribution (including a conversion contribution) along with the net income attributable to such contribution (NIA or earnings) from one type of IRA to another type of IRA, subject to certain conditions and limitations. For example, your Roth portfolio may have dropped in value. A recharacterized conversion (moving the money back to a Traditional IRA after making a conversion to a Roth) is treated as if the conversion had never occurred for tax purposes. You must notify your Financial Advisor/Private Wealth Advisor in writing to recharacterize the Roth IRA conversion plus earnings (Request a Morgan Stanley Recharacterization Authorization Form). The amount being recharacterized must be transferred directly from one IRA to the other IRA by the IRA custodian(s) and must be done no later than the due date of your federal income tax return (plus extension) for the year for which the regular contribution was made or in which the conversion distribution occurred.

Example: You convert $50,000 from a Traditional IRA to a Roth IRA this year and the value of the Roth later falls to $20,000. If you do not want to pay tax on the $50,000 converted to the Roth IRA, you can recharacterize the conversion by your tax filing deadline plus extensions (generally Oct. 15) of the year for which the conversion was made so that you do not pay tax on $30,000 more than you had in the Roth IRA.

Conversions From Traditional IRAs to Roth IRAsAn IRA owner, regardless of his or her modified adjusted gross income (MAGI), may choose to move IRA assets into a Roth IRA, also known as a conversion. The IRA owner pays the taxes now on the amount taken from the Traditional IRA* in order to take advantage of potential tax-free withdrawals of earnings in the future.

*Note: For purposes of this conversion discussion, Traditional IRAs include SEPs, SAR-SEPs and SIMPLE IRAs.

IMPORTANT POINTS ABOUT ROTH CONVERSIONS• If the IRA owner chooses to withhold

a portion of the conversion amount as a prepayment of the tax liability, the 10 percent premature distribution penalty tax may be assessed on the amount of the withholding, unless another exception applies (e.g., the IRA owner is over 59½ years old.). In addition, the amount withheld is reported as a distribution to the IRA owner and is not considered part of the conversion contribution.

• Unlike Traditional and Roth IRA contributions, conversions are reported and are taxable in the calendar year in which the conversion distribution occurs.

• The IRA owner may convert at any age, even after turning age 70½, as long as the distribution is eligible for conversion. For example, RMD amounts are ineligible for conversion and must be taken prior to any conversion to a Roth IRA.

• A SIMPLE IRA may not be converted into a Roth IRA if less than two years have passed since the SIMPLE IRA owner first participated in the employer’s SIMPLE Plan.

• An IRS Form 1099-R will be issued from the Traditional IRA reporting the amount converted as a distribution. An IRS Form 5498 will be issued on the Roth IRA reporting the amount converted.

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• You also have the option to later reconvert back to a Roth IRA. However, if you convert an amount from a Traditional IRA to a Roth IRA during any tax year and then transfer that amount back to a Traditional IRA via a recharacterization, you cannot reconvert that amount to a Roth IRA before the later of (1) January 1 of the tax year following the conversion or (2) the end of the 30-day period beginning on the day on which the IRA owner recharacterizes the contribution from the Roth IRA back to the Traditional IRA.

• A Form 1099-R is issued in the year of the recharacterization for tax reporting purposes. Each recharacterization of an IRA or Roth IRA must be reported as an IRA distribution on line 15a of Form 1040. Since the assets were transferred to a second IRA account, the amount taxable on Form 1040, line 15b, is zero. If a Roth contribution is being recharacterized, you might have to complete Form 8606. The instructions to Form 8606 require that a statement be attached to the tax return explaining the specific details of the recharacterization. For example, for a recharacterized contribution, a taxpayer must attach a statement that shows the total amount recharacterized broken down between earnings, contributions and the deductible amount if any.

The custodian of the first IRA account issues a Form 5498, IRA Contribution Information, for the tax year in which the

contribution was made. The custodian of the second IRA will also issue a Form 5498 to report the recharacterized contribution. All recharacterized contributions received by an IRA in the same year may be reported on one or multiple Forms 5498. Form 5498 is an information reporting form and is not attached to your tax return. You do not need the form to complete and file your tax return.

A recharacterization may be accomplished by the due date of the tax return including extensions, typically by October 15, if one of the following applies:

• If you file your return on time without recharacterizing, Form 1040X (Amended U.S. Individual Income Tax Return) may be required if your client had already filed Form 1040 and an IRA deduction is being taken or recharacterized.

• In general, if you must file Form 1040X, write “filed pursuant to section 301.9100-2” on the amended return and file it at the same place you filed the original return.

• A recharacterization of a contribution does not count as a rollover for purposes of the 60-day rollover rule.

HOW DO I CALCULATE THE TAXABLE PORTION OF MY TRADITIONAL OR SIMPLE IRA DISTRIBUTION FOR A CONVERSION TO A ROTH IRA?If all of the IRA owner’s Traditional IRAs including SEP, SAR-SEP and SIMPLE

BELOW IS THE FORMULA FOR CALCULATING YOUR NONTAXABLE PORTION OF THE DISTRIBUTION FOR CONVERSION PURPOSES:

Total of ALL Nondeductible

Contributions to ALL Traditional IRAs

Year-End Value of Traditional and SIMPLE IRAs, Plus any Distributions or Conversions

During the Year

X Total Distributions or

Conversions for the Year

Nontaxable Portion of Distribution for

Conversion=

IRAs —combined consist solely of pretax, deductible contributions and earnings, distributions or conversions from any of these accounts will be entirely taxable as ordinary income. Conversion distributions are reported and are taxable in the calendar year in which they occur.

If the IRA owner chooses to withhold a portion of the conversion amount as a prepayment of the tax liability, the 10 percent premature distribution penalty tax will be assessed on the amount of the withholding, unless another exception applies.

If the IRA owner filed IRS Form 8606 in each year a nondeductible contribution was made, the portion of the distribution or conversion attributable to the nondeductible contributions will not be taxed. The IRA owner should consult with his or her accountant or tax advisor to determine whether a Form 8606 was ever submitted in a previous tax year.

• When determining the taxable portion of an IRA distribution or conversion, the IRA owner must look at his or her entire IRA picture, which includes all of an IRA owner’s Traditional IRAs, including SEP, SAR-SEP and SIMPLE IRAs, but not his or her Roth IRAs or inherited IRAs.

The Roth Conversion rules are complex and may have immediate tax consequences; we strongly recommend you consult with your tax and/or legal advisor.

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Roth IRAsMany times, an investor’s primary concern when making an IRA contribution is that the funds are not accessible without a penalty tax or income tax consequence. In a Roth IRA, contributions are never tied up. Account owners may withdraw their contributions at any time, for any reason, without tax or penalty.

Distributions of earnings may be taken at any time, but the tax treatment is different depending upon the age and circumstances of the recipient.

There are three different tax treatments for distributions of earnings from Roth IRAs:

1. Tax-Free, Penalty-Free (known as “Qualified Distributions”) — Distributions taken after “Five-Year Holding Period” and made:a. On or after age 59½, orb. The distribution is used for

a qualified first-time home purchase (up to a $10,000 lifetime maximum), or

c. Due to the qualifying Disability of the IRA holder, or

d. Due to the Death of the IRA holder

2. Tax, With No 10 percent IRS Penalty Tax (“Nonqualified Distributions”) — Distributions taken before the “Five-Year Holding Period” ends and either:

a. On or after age 59½, orb. Qualifying Life Event

(see Schedule C)

3. Tax, With a 10 percent IRS Penalty Tax (“Nonqualified Distributions”) — Distributions taken regardless of the holding period and either:a. Before age 59½ orb. Is not due to a Life Event

Exception (see Schedule C)

ORDERING RULESThere are specific ordering rules that determine the characteristics of amounts distributed in a nonqualified distribution and, in turn, whether the distribution will be taxable and/or subject to a penalty tax. For example, if the Roth IRA account is a combination of both regular (annual) contributions and conversion amounts, for tax purposes, amounts distributed will be considered ordered as follows:

First, Regular (annual) Contributions are treated as being distributed from a Roth

Five-Year Holding Period:In order to qualify for an income tax-free and penalty tax-free distribution, your Roth IRA distribution must occur after the Five-Year Holding Period. The Five-Year Holding Period is considered to begin on January 1 of the year for which you make your first regular contribution (or, if earlier, the year in which you make your first rollover or conversion contribution) to any Roth IRA you hold as owner (and not beneficiary) and ends at the end of five full calendar years. Once the Five-Year Holding Period has been satisfied with respect to any Roth IRA contribution (regular, conversion or rollover contribution), it is deemed to be satisfied for all later Roth IRA contributions. In addition to the Five-Year Holding Period, one of the Life Event Exceptions must apply.

IRA at any time, for any reason, income tax-free and penalty tax-free.

Next, conversions or rollover contributions will be treated as distributed and will not be taxed a second time. However, if the nonqualified distribution is taken less than five years after the applicable year of the conversion contribution, the 10 percent premature distribution penalty tax will be assessed on the conversion amounts to extent such was taxable at the time of the conversion, unless a Life Event Exception applies.

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Required Death Distribution Options for a Spouse Beneficiary

Required Death Distributions for Roth IRAsAlthough a Roth IRA owner is not subject to the Required Minimum Distribution (RMD) rules when he or she turns age 70½, the beneficiary of a Roth IRA is subject to RMD rules when the Roth IRA owner dies. Failure to take the RMD may subject the beneficiary to an excise penalty tax of 50 percent of the amount that should have been distributed, but was not. Each Roth IRA account stands on its own for purposes of calculating the post-death required minimum distributions.

If the spouse is the sole designated beneficiary of the Roth IRA, he or she has the following options:

• Five-Year Rule: Withdraw all assets either in a “lump sum” or in installments by the end of the fifth full year following the year of death of the IRA participant to avoid the excise tax penalty.

• Roll over the Roth IRA into his or her own existing or new Roth IRA.• Open a Roth Inherited IRA and, if the spouse is either the sole beneficiary of the Roth IRA or timely establishes

the Roth Inherited IRA before the end of the year following the year of the Roth IRA owner’s death, distribute based on the single life expectancy of the spouse beneficiary, recalculated. The distributions must begin by the end of the year (December 31) following the year of death of the Roth IRA owner, or the year the IRA owner would have been 70½ years old, whichever is later. The life expectancy factor should start with the spouse beneficiary’s age in the year distributions must begin.

If the spouse beneficiary were to pass away once distributions started, distributions may continue based on the remaining life expectancy of the spouse beneficiary, determined on a non-recalculation (term-certain) basis.

Required Death Distribution Options for a Non-Spouse Beneficiary

If the non-spouse beneficiary is:

One Individual — Open a Roth Inherited IRA:• Distribute based on the single life expectancy of the non-spouse beneficiary, using the non-recalculation (term-

certain) method. The distributions must begin by the end of the year (December 31) following the year of death of the Roth IRA owner. The life expectancy factor should be determined using the non-spouse beneficiary’s age in the year after the year of the Roth IRA owner’s death.

• Five-Year Rule: Withdraw all assets either in a “lump sum” or in installments by the end of the fifth full year following the year of death of the Roth IRA owner.

Multiple individuals (assuming the decedent’s Roth IRA has not been divided into separate Inherited IRAs by December 31 of the year following the year of death):• Open a Roth Inherited IRA and distribute based on the single life expectancy of the oldest designated

beneficiary, using the non-recalculation (term-certain) method. The life expectancy is determined using the oldest designated beneficiary’s age in the year after the year of the Roth IRA owner’s death. Distributions must begin by the end of the year following the year of death of the Roth IRA owner. This rule applies even if one of the beneficiaries listed is the Roth IRA owner’s spouse.

• Five-Year Rule: Withdraw all assets either in a “lump sum” or in installments by the end of the fifth full year following the year of death of the Roth IRA owner.

A Non-Living Entity or Multiple Beneficiaries Containing at Least One Non-Living Entity (assuming the decedent’s Roth IRA has not been divided into separate Inherited IRAs):• Five-Year Rule: Open a Roth Inherited IRA and withdraw all assets either in a “lump sum” or in installments by

the end of the fifth full year following the year of death of the IRA owner.

Note: If the Roth IRA is divided into separate accounts (one for each beneficiary) by December 31 of the year after the Roth IRA owner’s death, each separate IRA may be distributed to each beneficiary using the rules for “One Individual” above. If one beneficiary is the surviving spouse, the special elections for a surviving spouse will apply to his or her separate Roth IRA.

Last, Earnings will be taxed and subject to a 10 percent premature distribution penalty tax, unless a Life Event Exception applies.

There are no restrictions stating when you must stop contributing to a Roth IRA.

In addition, unlike a Traditional IRA owner, Roth IRA owners are not required to take Required Minimum Distributions (RMDs) from the Roth IRA during their lifetime, so you can generally leave as much of your money in the account

to benefit your heirs as you wish. If tax rates rise in the future, an income tax-free inheritance is even more valuable because your beneficiaries will receive the income without raising their individual tax brackets.

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HOW TO DETERMINE THE REQUIRED MINIMUM DISTRIBUTIONFinancial Institutions, as IRA Custodians, are not required to calculate the Required Death Distribution (RDD) amount for the inheriting beneficiary. As a customer service, if the Inherited IRA data, including the client’s selection of a distribution option, is entered into Morgan Stanley record-keeping systems, the system will automatically calculate an estimated RDD amount, and display the RDD information on the quarterly statement page. If distributing over a person’s life expectancy, the amount of the RDD is determined by taking the Roth IRA account balance as of the end of the prior year (December 31 value), then dividing it by the applicable life expectancy factor obtained from the IRS Single Life Expectancy Table (for use by beneficiaries). This amount is only a minimum; the beneficiary may always distribute more than this amount.

Important Points About Required Minimum Distributions

HOW TO DETERMINE THE LIFE EXPECTANCY FACTOR• Single, Recalculated Life

Expectancy: When the spouse beneficiary chooses this option, the life expectancy factor is determined annually using the spouse beneficiary’s age as of his or her birthday in each year for which the Required Minimum Distribution must be made and the single spouse is alive. The spouse beneficiary refers back to the IRS Single Life Expectancy Table each calendar year to obtain the new factor.

• Single, Non-Recalculated (Term-Certain) Method: A designated non-spouse beneficiary’s life expectancy is calculated using the age of the beneficiary in the year following the year of the Roth IRA owner’s death, using the IRS Single Life Expectancy Table. The life expectancy factor is reduced by “one” for each subsequent year. The designated beneficiary does not refer back to the Single Life Expectancy Table annually. This method will also be used by remainder beneficiaries, but will be based on the

life expectancy used by the original beneficiary (and not the remainder beneficiary’s life expectancy).

WHEN BENEFICIARIES ARE DETERMINEDFor the purposes of calculating post-death Required Minimum Distributions (RMDs), the designated beneficiary may be determined as late as September 30 following the year of the Roth IRA owner’s death. The beneficiary may be changed after the Roth IRA owner’s death only by one or more beneficiaries either properly and timely disclaiming their interests in the IRA, or taking total distributions of their shares of the IRA prior to September 30 following the year of the Roth IRA owner’s death.

For example, a Roth IRA owner named his spouse as his sole primary beneficiary and his three children as his contingent beneficiaries. When the Roth IRA owner passed away, his spouse decided to disclaim her right to the Roth IRA assets. If the primary beneficiary timely and properly disclaims the inheritance, this makes the contingent beneficiaries the new primary beneficiaries. One of the sons will fully distribute his allocation and the remaining two sons

THE REQUIRED DEATH DISTRIBUTION FORMULA IS:

December 31 Prior-Year Balance ÷ Single Life

Expectancy Factor

Required Minimum

Distribution=

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would be considered the designated beneficiaries of their father’s Roth IRA.

If there are multiple beneficiaries, the Roth IRA may be split into separate accounts by December 31 of the year after the year of the Roth IRA owner’s death. In such case, the distribution of each account will be calculated separately for each beneficiary. To continue with our example, if the two sons divide the Roth IRA into separate accounts by the December 31 deadlines, each son will be able to use his own life expectancy to calculate the RMDs to be distributed from the Roth IRA.

INHERITED ROTH IRAWhen a Roth IRA owner passes away, the beneficiary may open a Roth Inherited IRA. The beneficiary will take the Required Minimum Distributions from this type of account and it will be reported on IRS Form 1099-R, under the beneficiary’s Social Security Number.

Note: If the surviving spouse is under age 59½ and the applicable five-year holding periods (for contributions, conversions or rollovers) had not been met by the decedent, the spouse should consider opening a Roth Inherited IRA in the decedent’s name as a beneficiary Roth IRA. This is of particular importance if the spouse will need distributions

before age 59½. By keeping the assets in an Inherited IRA, any distribution of earnings may be subject to income tax, but not the 10 percent penalty tax. When the surviving spouse reaches age 59½, the Roth IRA can be rolled into the survivor’s IRA. If the surviving spouse rolled over the Roth IRA and then needed a distribution before age 59½, the 10 percent penalty tax would be imposed on a distribution of earnings, unless another exemption applies.

• IRAs are included in the account owner’s taxable estate, but are generally excluded from probate.

• If the beneficiary decides to change the institution where the decedent’s IRA account is being held, a direct transfer can occur to move the decedent’s IRA from one institution to another, as long as the new institution accepts it. The Roth IRA at the new institution should remain in the name of the decedent, for the benefit of the beneficiary. This transfer is not, by itself, a taxable event.

SPECIFIC FOR SPOUSE BENEFICIARY• If the spouse is the sole primary

beneficiary, the Roth IRA may avoid federal estate taxes because it qualifies for the unlimited marital deduction.

• Only a surviving spouse has the option to roll the Roth IRA into his or her name alone.

INCOME IN RESPECT OF A DECEDENT (IRD)One other important item to remember is that all or a portion of a distribution from a decedent’s IRA may qualify as Income in Respect of a Decedent, or “IRD.” If the IRA owner’s estate paid estate taxes, then the percentage of those taxes attributable to the value of the IRA may be deducted by the beneficiary to offset income from an IRA distribution. The IRD rules are complex and we strongly recommend you consult with your tax and/or legal advisor.

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Choosing an IRA BeneficiaryWhen opening an IRA, one of the many decisions an IRA owner must make is the choice of who (or what) will be the beneficiary of the IRA assets. This decision has far-reaching consequences, because the choice of beneficiary will affect the IRA owner during his or her life and will likely continue to have an effect on the beneficiary long after the IRA owner’s death. The choice of a beneficiary also has estate planning implications. The rules for designating a beneficiary are the same for Traditional and Roth IRAs.

Keep in mind that an IRA beneficiary designation is revocable; it can be changed at any time. Each separate IRA account stands on its own for purposes of designating a beneficiary.

MAKING A CHOICEMost IRA documents, including Morgan Stanley’s, permit an individual to designate primary and contingent beneficiaries. If the IRA owner dies, the IRA assets will eventually pass to the primary beneficiary, provided that the primary beneficiary survives the IRA owner and does not “disclaim” the right to the assets (disclaiming an IRA will

be discussed later in this booklet). If the primary beneficiary does not survive the IRA owner, or timely and properly disclaims the IRA, the IRA asset will pass to the contingent beneficiary. If the contingent beneficiary does not survive the IRA owner’s death either, or disclaims, then the assets will pass as if no designation were made unless the IRA document designates a beneficiary.

The Morgan Stanley IRA documents provide that if the IRA owner doesn’t designate a beneficiary, or all beneficiaries predecease the IRA owner or disclaim their interests, the designated

beneficiary will be the surviving spouse or, if none, surviving children in equal shares or, if none, the parents, or if none, the IRA owner’s estate.

Keep in mind that your beneficiary designation must be supplied in writing to the custodian of your IRA. This designation will determine who will receive your IRA assets when you pass away, not your will. Your IRA custodian will generally honor the last-dated designation received from you during your lifetime.

WHEN DESIGNATED BENEFICIARIES ARE DETERMINEDFor RMD purposes, the designated beneficiary may be determined as late as September 30 following the year of the IRA owner’s death. However, if the deceased IRA owner’s IRA is divided into separate inherited IRAs for the named beneficiaries by the end of the year following the year of the IRA owner’s death, each beneficiary whose interest was timely transferred to a separate inherited IRA can generally use his or her own life expectancy to calculate the RMD, disregarding the life expectancies of the other beneficiaries of the deceased owner’s IRA. Note, however, these separate account rules are not available to the beneficiaries of a trust with respect to the trust’s interest in the IRA, meaning that if a trust is named as the IRA beneficiary and satisfies the special trust look-through requirements, it must use the life expectancy of the oldest applicable beneficiary of the trust. The designated beneficiary for RMD purposes may be changed after the IRA owner’s death only by one or more beneficiaries either disclaiming, or taking total distributions of their shares of the IRA prior to September 30 following the year of the IRA owner’s death. When a beneficiary

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Keep in mind that your beneficiary designation must be supplied in writing to the custodian of your IRA. This designation will determine who will receive your IRA assets when you pass away, not your will. Your IRA custodian will generally honor the last-dated designation received from you during your lifetime.

disclaims his or her interest in the IRA, the IRA is distributed as if the beneficiary had died before the IRA owner.

For example: A Roth IRA owner named his spouse as his sole primary beneficiary and his three children as his contingent beneficiaries. When the Roth IRA owner passed away in the current year, his spouse decided to disclaim her right to the Roth IRA assets. This makes the contingent beneficiaries (the three sons) the new primary beneficiaries. One of the sons will take a total distribution of his allocated share of the IRA soon after the father’s death. The other two remaining sons would be considered the designated beneficiaries of their father’s Roth IRA. By December 31 of the year following their father’s death, the two remaining sons may divide the Roth IRA into two separate accounts and take distributions over their respective life expectancies.

WHOM YOU MAY NAME AS BENEFICIARYAn IRA owner may name his or her spouse as the beneficiary of the IRA. Being named as beneficiary gives the surviving spouse the option of rolling over the decedent’s IRA into one for the survivor, thus continuing the potential tax deferral. In addition, naming the spouse as beneficiary may minimize federal estate taxes, because such a designation qualifies the assets for marital deduction.

Note that, in many states, a spouse may be entitled to a portion of the IRA, even though the spouse may not be named as the beneficiary. In community property states, the nonowner spouse may have community property interest in the IRA. The spouse can relinquish his or her community property interest in writing, allowing the IRA owner to name someone else as beneficiary of the

IRA. (This applies in Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and any other state adopting a community property law.)

This leads to another point: Naming any beneficiary other than the estate will cause the IRA to bypass the probate process. This does not mean that the IRA will avoid estate taxes or

avoid being subject to other aspects of estate administration, such as the payment of the decedent’s debts. As mentioned, an IRA left to a spouse qualifies for the estate tax marital deduction. An IRA left to charity qualifies for the estate tax charitable deduction. Assets passing to other beneficiaries will be included in the taxable estate.

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Non-Spouse Beneficiaries

Naming Individuals: Choosing as a beneficiary an individual who is not the spouse eliminates the rollover option and potentially subjects the IRA to estate taxes. However, there are methods by which non-spouse beneficiaries may continue the IRA on a fully or partially tax-deferred basis for many years after the death of the IRA owner. For example, when the IRA owner dies, the non-spouse beneficiary may choose to take minimum distributions from the IRA over the beneficiary’s life expectancy.There are other reasons for naming a non-spouse beneficiary to the IRA. First, the IRA may be the only asset that the IRA owner can use to take advantage of the unified estate and gift tax credit equivalent. Second, the IRA may be left to the children from the IRA owner’s prior marriage, particularly if there is enough in other assets to provide for the current spouse.• Once you pass away, your non-spouse beneficiary cannot roll over your IRA into an IRA in his or her name alone.• Once you pass away, your non-spouse beneficiary may have the option of depleting your IRA assets based on his

or her life expectancy.• Your children and grandchildren can be made beneficiaries of your IRA. However, if the children are minors at

the time of payment to them as your beneficiaries, the IRA proceeds will have to be put into an account for their benefit and controlled by either a parent or court-appointed legal guardian. In many states, this account would be established under the Uniform Transfers to Minors Act (UTMA).

• If your grandchildren are beneficiaries, the generation-skipping transfer tax may apply at your death.

Naming Non-Living Entities: • If the individual is planning on leaving assets to a charity, estate taxes may be reduced.• A trust may also be named as the beneficiary of the IRA. This can be an advantage to help control events after

death. If the trust meets certain requirements, the life expectancy of the oldest applicable trust beneficiary may be used to calculate Required Minimum Distributions after your death. A trust would so qualify if the trust meets the following criteria:I. The trust is irrevocable or becomes irrevocable no later than the death of the IRA owner;II. The trust is valid under state law;III. The trust has individual beneficiaries who are beneficiaries with respect to the trust’s interest in the IRA and

are identified in or identified from the trust document; andIV. The trustee provides the IRA custodian with either a copy of the trust document or a written certification that

I and II of the criteria are true and listing the individual beneficiary or beneficiaries of the trust.• If the estate is named as beneficiary, the IRA may have to go through probate.• If a non-living entity is named as beneficiary and the IRA owner dies before his or her RBD, the IRA must be

distributed by December 31 of the fifth year after the year of death, unless the named beneficiary is a trust that satisfies the requirements detailed above. If the IRA owner dies on or after the RBD, the IRA may be distributed over the remainder of the IRA owner’s life expectancy using the IRA owner’s age in the year of death and the non-recalculation (term-certain) method of calculating RMDs.

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Multiple BeneficiariesYou may name more than one primary or contingent beneficiary and specify a dollar amount or percentage of your IRA proceeds to be paid to each beneficiary. You may also specify whether the beneficiaries’ right to the proceeds will continue to their children and their children’s children (referred to as “your issue”) should one of your beneficiaries predecease you.

Three common designations are:

1All My Surviving Children OnlyThis beneficiary designation will benefit your surviving children only. Should any of your children predecease you, their share will be divided among your surviving children. There is no benefit directly passed on to their children. For example, if you designate your three children as equal beneficiaries to each receive 1/3 of your IRA proceeds and one dies before you, the remaining two will now each receive 1/2 of your IRA proceeds.

2All My Issue — per stirpesThis beneficiary designation provides that the children of a beneficiary that predeceases you will share equally in the IRA proceeds that would have been paid to the deceased beneficiary. For example, if you designate your three children as equal beneficiaries to each receive 1/3 of your IRA proceeds and one dies before you, his or her 1/3 portion will be shared by his or her surviving children.

3All My Issue — per capitaThis beneficiary designation provides that the children of a beneficiary that predeceases you will share equally in the IRA proceeds with your surviving children as individuals and not as members of a family as in the “per-stirpes” designation above. This can have a substantial impact on the benefit paid to your surviving children. For example, you designate your three children as equal beneficiaries to each receive 1/3 of your IRA proceeds. If one of them should die before you, leaving his or her own three children behind, your two surviving children and your deceased beneficiary’s three children each would have a 1/5 share in your IRA proceeds. The premature death of one of your children has caused your two surviving children to receive a benefit of 1/5 of the IRA proceeds reduced from 1/3 of the proceeds.

Disclaimers A disclaimer is used when an inheriting beneficiary “waives” his or her right to an IRA owner’s account. The effect of disclaiming beneficiary rights will make the contingent beneficiary the new primary beneficiary.Disclaimers may also be used to affect estate taxes. For example, a spouse might disclaim a portion of an IRA so it will be paid to a Credit Shelter Trust or a parent may want to pass the income received from an IRA to a child. However, for a disclaimer to be effective for tax purposes, it must comply with Internal Revenue Code (“IRC”) section 2518(b) and applicable state and local law, and it must be received by the IRA custodian no later than nine (9) months after the decedent’s death or the beneficiary’s 21 birthday, whichever is later.Disclaimers are not limited to spouses; any beneficiary may make a disclaimer. The disclaimer must not direct who receives the assets. Violating these rules will treat the redirection of the assets as a gift from the person making the disclaimer to the other party, and the IRA will be taxable to the person making the nonqualifying disclaimer. Disclaimers are usually drafted by the beneficiary’s attorney.

THE STRETCH-OUT IRA OPTIONAs IRA accounts come to represent a substantial portion of an individual’s wealth, two questions arise:

1. Who receives the IRA after the death of both the IRA owner and the designated beneficiary?

2. For how many years may IRA payments be stretched out?

The Morgan Stanley Traditional Inherited IRA and Roth Inherited IRA permit IRA beneficiaries to name individuals or entities such as trusts or charities to receive IRA distributions that come due after the deaths of both the IRA owner and the designated

beneficiary. Such individual or entity is referred to as the “remainder beneficiary.”

The IRA owner’s designated beneficiary will have the ability to name his or her own remainder beneficiary who will continue Required Death Distributions if the term-certain (non-recalculated) payments are not completed during the lifetime of the designated beneficiary. This will stretch out the Required Death Distribution until the payout term is finished.

The stretch-out option is not meant to increase the total number of years over which IRA payments may be made. Remember, only the life expectancies

of the IRA owner or the beneficiary designated (by the IRA owner or by default according to the IRA plan document) as of the date of death of the IRA owner may be used to determine Required Death Distributions. Payments made to a remainder beneficiary will use the non-recalculating (term-certain) method based on the life expectancy used by the original IRA beneficiary.

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In order to request a QCD, you must complete an IRA Distribution Form indicating the charity’s legal name. You may also provide a Letter of Authorization containing distribution instructions including the charity’s name, or if you have check-writing ability on your IRA, you may write a check in the name of the charitable organization. You are not permitted to reverse a previously processed regular distribution and make it a qualified charitable distribution; however, you may do a 60-day rollover if the regular distribution is otherwise eligible. Remember, a QCD is a reportable event and the portion of the distribution that is treated as your RMD for the year is not eligible for rollover.

If you have a valid IRA Distribution Form for verbal distribution authorization (VDA) on file, and the QCD is going to the same charity as in past years, you may request your Financial Advisor or Private Wealth Advisor to process a QCD based on the existing verbal instructions. If this is a new QCD or you are changing the charity, a new distribution form is required.

A QCD can be processed “in-kind,” only if the receiving charity has a Morgan Stanley Active Assets Account (AAA) or Basic Securities Account (BSA).

There are no special reporting requirements on IRS Form 1099-R for QCDs. The QCD is reported on Form 1099-R like any other IRA distribution; however, you must report the QCD when filing your income taxes according to the specific instructions for Form 1040. Consult with your tax advisor for details.

Qualified Charitable Distributions (QCDs)In December 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 made the Qualified Charitable Distribution (QCD) provision permanent. The provision allows an Individual Retirement Account (IRA) owner (or beneficiary after the death of the owner) who is age 70½ or older to exclude from gross income up to $100,0001 in distributions made directly from the IRA to certain public charities.

1 $100,000 is the annual maximum charitable distribution that an individual may make, no matter how many IRAs the client owns or where they are held.

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THE FOLLOWING LIST DESCRIBES THE IRS GUIDELINES:• Not all tax-exempt organizations

are eligible to receive these distributions; the donation must be made to a qualified tax-exempt charitable organization. The client has to be clear that he or she, and not Morgan Stanley, is responsible for making this determination. The donation may not be made to the following:– Private (nonoperating) foundation– Supporting organization– Donor-advised fund operated by

a public charity or an entity such as a Charitable Remainder Trust where another person would have an interest

• The IRA owner or beneficiary (in the case of an Inherited IRA) must have attained age 70½ at the time of distribution.

• Generally, all IRAs are eligible to make these distributions except for ongoing Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. A SEP or SIMPLE IRA is considered ongoing if the employer made a contribution for the year in which the QCD would be made. For example: In January 2016, employer makes a contribution to an employee’s SEP (or SIMPLE) for tax year 2015. The SEP or SIMPLE is considered ongoing for tax year 2015 and the IRA owner (employee) is not permitted to take a QCD from that IRA for 2015.

• Form 1099-R codes: Distributions are reported on Form 1099-R as code 7 for Normal distributions or 4

If you have a valid IRA Distribution Form for verbal distribution authorization (VDA) on file, and the QCD is going to the same charity as in past years, you may request your Financial Advisor or Private Wealth Advisor to process a QCD based on the existing verbal instructions.

for Death distributions in box 7 or code T or Q from a Roth IRA. There is no special reporting performed by Morgan Stanley. See Tax Information below for particulars on how to report distributions, consult your tax advisor and the IRS instructions for Form 1040.

• Ordering rules for distributions: Where individuals have made nondeductible contributions to their Traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as is the case with regular distributions. In the case of a Roth IRA, the first amounts transferred to the charity are deemed to be coming from the earnings portion of the account. You need to consult with your tax advisor.

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An IRA is intended to be a long-term savings vehicle for your retirement. To discourage early withdrawals, the IRS imposes a 10 percent penalty tax on withdrawals made before age 59½ in addition to any income tax owed on the distributions. In the case of an unforeseen emergency, when you need to access your retirement funds before age 59½, the IRS permits premature withdrawals without the 10 percent penalty tax in certain limited circumstances (IRC 72(t)(2)), including receipt of substantially equal periodic payments (“SEPP”), referred to as Section 72(t) distributions (refer to IRS Section 72(t)(2) for additional information)). Keep in mind, taking regular distributions from your IRA before age 59½ may leave you with insufficient assets to fund your future retirement needs.

SOME QUESTIONS TO CONSIDER BEFORE TAKING A 72(T) DISTRIBUTION INCLUDE THE FOLLOWING:

• Do you understand that the longer the time period these distributions must be taken, that is, commencing them well before age 59½, the less funds will be available for true retirement needs?

• Does your IRA hold sufficient assets to fund the 72(t) distributions until age 59½?

• Are the distributions needed now to cover expenses?

• Will you feel comfortable taking these distributions for the required period?

• Do you have other options to meet your current income needs?

• Do you qualify for any other exceptions to the 10 percent penalty tax?

• Are you trying to solve for a short-term cash flow crisis for which 72(t) distributions might not be the right answer given the required distribution period?

Depending upon your individual circumstances, 72(t) distributions may be a viable option to provide retirement income before age 59½. You should consider all of your financial resources, needs and age, among other factors, before starting 72(t) distributions.

The IRS has approved three “safe harbor” calculation methods for 72(t) payments. Each of the methods may be applied over the IRA owner’s single or the joint life expectancies of the IRA owner and oldest beneficiary. Once a method of calculation and distribution amount has been determined, the distributions must continue unchanged for five years from the date of the first payment or until you attain age 59½, whichever is later. IRA owners using the 72(t) calculation cannot

Substantially Equal Periodic Payments — 72(t) Payments

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“Safe Harbor” Calculation Methods

Life Expectancy (Required Minimum Distribution Method):

In the first year, you must choose to use either your single life expectancy or a joint life expectancy with that of your oldest designated beneficiary. This election is irrevocable. Under the life expectancy method, you simply divide your December 31 prior-year balance by your single or joint life expectancy factor, found in the Life Expectancy Tables (see Appendix). This method generally produces the smallest distribution amount. The annual payment must be refigured each year.

Amortization: The second method is amortization, a commonly used mortgage calculation. Under this method, your life expectancy factor is used along with a rate “not more than a reasonable rate of interest”* that your account should be expected to earn. Distributions are then calculated each year in equal payments so that your account balance will reach zero at the end of the life expectancy period.

Annuitization: The third method is the annuity method. This calculation utilizes a mortality table and a rate “not more than a reasonable rate of interest”* to determine an annuity factor. The payment schedule is then determined by dividing the IRA balance by the annuity factor to determine the annual equal payment, which will result in your account reaching zero at the end of the life expectancy period. This method often produces a larger distribution withdrawal amount than the other two methods because the mortality tables assume a shorter life span.

*Note: The interest rate used to calculate the 72(t) distribution payments must not exceed 120 percent of the Federal Mid-Term Rate for either of the two months preceding the first distribution.

modify the payments,* other than for reasons of death or disability. Failure to comply with the schedule may result in a retroactive 10 percent penalty tax on all distributions received prior to age 59½ and interest for the deferral period. Once 72(t) distributions have commenced, another penalty tax exemption generally cannot be used to withdraw or add additional money to your account.

*Note: Although the calculation must be based on the same method each year, an individual who has elected 72(t) distributions using either the amortization method or the annuitization method may make a one-time change in any subsequent year to the required minimum distribution (RMD) method. This change in method will not be treated as a modification nor will it trigger a penalty tax. Once this one-time change is made, the RMD method must be followed in all subsequent years.

72(t) distributions can be taken from Roth IRAs in essentially the same manner as Traditional IRAs. However, since Roth IRA contributions can be withdrawn without incurring any income taxes or penalty taxes and Roth IRA distributions are always treated as consisting first of contributions, this strategy need only be used for a Roth IRA if the client is under age 59½ and wants to withdraw earnings after exhausting contributions.

Applying one of the three “safe harbor” methods to an IRA balance will generate an annual payout amount. If an IRA owner desires a smaller distribution than what their IRA balance is calculating, consider setting up multiple IRA accounts and calculate the 72(t) payment amount on only one account balance. The second IRA account would stand on its own and could be left undisturbed until age 59½ or tapped at any other time without disrupting the payment schedule on the account used for 72(t) payments. However, the IRS has permitted IRA owners to aggregate two or more IRAs for 72(t) purposes while taking distributions from only one IRA. Under this approach, a distribution from any other IRAs could result in a 10 percent penalty tax becoming due on past years’ 72(t) payments.

72(T) PAYMENT SUMMARY:Before you begin taking 72(t) payments, you should understand the following restrictions associated with these types of payments.

• Distributions must be taken at least annually.

• A series of distributions must continue unchanged for five years from the date of the first payment or until you have attained age 59½, whichever is later. 72(t) payments may be modified or stopped without penalty following the death or disability of the IRA holder.

• Once payments begin, your account is restricted and you will not be permitted to make new contributions to your account (including a transfer or rollover contribution) until the 72(t) period expires.

• If a modification occurs (other than death or disability), the individual will retroactively incur the 10 percent early distribution tax penalty, plus interest, for each distribution occurring before age 59½ beginning with the first year of 72(t) payment distributions.

• You must calculate payments over your life expectancy or your and your beneficiary’s joint life expectancy.

• You may move your entire IRA balance to another IRA custodian, as long as you continue to taking your scheduled 72(t) payments.

You will not be penalized if you deplete your IRA account balance before your 72(t) payment schedule has been satisfied; as long as you have used an acceptable method to determine the 72(t) payments and you did not improperly modify the IRA balance.

The 72(t) rules are complex and we strongly recommend you consult with your tax and/or legal advisor.

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IRA Rollovers

A plan participant leaving an employer has the following four options (and may engage in a combination of these options depending on their employment status, age and the availability of the particular option):

1Cash out the account value and take a lump sum distribution from the current plan subject to mandatory 20 percent federal income tax withholding, as well as potential income taxes and a 10 percent penalty taxOR to continue tax-deferred growth.

2 Leave the assets in the former employer’s plan (if permitted).

3 Roll over the retirement savings into the new employer’s qualified plan, if one is available and rollovers are permitted.

4 Roll over the retirement savings into an IRA.

NOTE: Before making a decision to initiate a rollover to an IRA, you should consider the various factors which may influence your decision and discuss such with your own legal or tax advisor. A few of the factors which should be discussed include (but are not limited to) the difference in:• Investment Options• Fees and Expenses• Services• Penalty Tax-Free Withdrawals• Creditor Protection in Bankruptcy and From Legal Judgments• Required Minimum Distribution Rules• The Tax Treatment of Employer Stock.

Indirect Rollover An indirect rollover occurs when an IRA owner takes a distribution from the IRA, with the check made payable to the IRA owner. Within 60 days of receipt of the check (including weekends and holidays), the IRA owner deposits the exact amount (or shares) of the distribution back into another IRA (including the IRA from which the distribution came) as a rollover contribution. This will be a reportable event but, if completed correctly, it will not be a taxable event.

NOTE: When you take a distribution in-kind and wish to roll over the security or other property back into your IRA within a 60-day period, the identical security or property must be moved back in; however, the security does not have to be the same serial number.

Beginning January 1, 2015, individuals may only roll over one distribution he or she receives during any 12-month period, no matter how many IRAs or the types of IRAs (i.e., Traditional, Roth, SIMPLE or SEP IRAs) the individual owns. Roth IRA conversions, trustee-to-trustee transfers between IRAs, IRA recharacterizations, and rollovers to or from eligible retirement plans (other than IRA-based plans) are not subject to this limitation.

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Direct Rollovers A direct rollover occurs when an employee is going to receive an eligible rollover distribution from an employer-sponsored sponsored qualified plan (such as a 401(k), Profit Sharing or Defined Benefit plan) and chooses to have the qualified plan pay the distribution directly to the custodian or trustee of an eligible retirement plan, such as a Traditional IRA. The IRA owner should never have the possession or control of the funds. This will be a reportable event but, if completed correctly, it will not be a taxable event. Direct rollovers avoid the mandatory 20 percent withholding for Federal income taxes that otherwise applies to eligible rollover distributions.

If you are interested in initiating a direct rollover, contact your previous employer(s) about the paperwork needed to complete a direct rollover of your qualified retirement plan assets to your IRA or new employer’s qualified plan.

You are permitted to roll over qualified plan assets directly to a Roth IRA; however, there are special rules involved in transferring a “pretax” retirement plan balance to a Roth IRA. In general, the pretax retirement plan assets rolled to a Roth IRA are subject to income taxation for the year of the distribution from the plan, unless the pretax retirement plan assets came from a designated Roth account under that plan. You should speak with your tax advisor about the impact this may have on you before you make that decision.

NOTE: When you take a distribution in-kind and wish to roll over the security or other property back into your IRA within a 60-day period, the identical security or other property must be moved back in; however, the security does not have to be the same serial number.

Direct Transfers A direct transfer is a nonreportable, nontaxable movement of IRA assets from one custodian to another. This is not considered a distribution, as the IRA owner never takes constructive receipt of the assets. Instead, the entire transfer occurs solely between the resigning and accepting custodians.

Typically, the IRA owner will choose a new custodian, establish an IRA, and request that they collect his or her IRA assets from the old custodian. Once the IRA owner completes the new custodian’s direct transfer form, the new custodian will forward the request to the old custodian. The old custodian will then directly transfer the assets, either in cash or in-kind, to the new custodian.

Unlike indirect rollovers, there is no limit to the number of direct transfers that the IRA owner may initiate.

NOTE: A SIMPLE IRA may not be rolled over into a Traditional IRA if it is less than two years since the SIMPLE IRA participant first participated in the Plan.

Net Unrealized Appreciation (NUA)

If you hold appreciated employer stock in your workplace retirement plan, you may benefit from favorable tax treatment of the NUA in the stock’s current value. NUA is the difference between the value of employer stock on the day it was contributed to or purchased in your plan and its value on the day you receive the shares as part of a lump sum distribution. In order to take advantage of the NUA tax strategy, you must take action while the stock is still in your workplace retirement plan. Once the stock is rolled over into your IRA, the NUA tax strategy cannot be used. The NUA rules are complex and we strongly recommend you discuss this tax strategy with your tax and/or legal advisor prior to exiting a qualified plan.

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Distributions to Nonresident AliensA nonresident alien (NRA) is a person who is not a citizen of the United States or does not maintain a tax residence within the country. NRAs are subject to special tax consideration. If you are claiming NRA status, you must provide IRS Form W-8 (BEN) to your Financial Advisor/Private Wealth Advisor. Payments to properly documented NRAs are generally exempt from IRS 1099-R reporting and backup withholding rules and instead are reported on IRS 1042-S. However, tax law requires Morgan Stanley to withhold at a rate of 30 percent from IRA distributions for NRA withholding purposes. Special Internal Revenue Code (IRC) provisions or income tax treaties may reduce or eliminate this withholding if you have timely provided Morgan Stanley a properly completed W-8 BEN. It is important that you consult with your tax advisor if you are claiming NRA status.

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Internal Revenue Service (IRS) Forms

Reporting Purpose: • Distributions from all IRAs• Conversions and reconversions from Traditional (including SEP) and SIMPLE IRAs to a Roth IRA.• Recharacterization out of an IRA

When is the Form Mailed? The Form must be mailed to the IRA owner by the IRA Custodian on or before January 31 of the year following the calendar year of the distribution, conversion (or reconversion) out of the Traditional or SIMPLE IRA or recharacterization, unless your Form 1099-R is furnished to you as part of a consolidated reporting statement in which case the Form must be sent to you on or before February 15 of the calendar year following the reportable event.

IRA Owner’s Responsibilities:

First, you should verify the accuracy of the information on the form and contact your IRA Custodian immediately if there is a discrepancy. You will need this form to complete your tax returns. If taxes have been withheld from your distribution, you must attach a copy of Form 1099-R to your IRS Form 1040. You should also keep a copy with your tax records.

Reporting Purpose: • Contributions to Traditional and Roth IRAs for the tax year for which the contribution were made.• Contributions to a SEP IRA, SIMPLE IRA for the calendar year in which the contributions were made.• Conversion contributions to a Roth IRA.• Rollovers to IRAs.• Recharacterization into a Roth or Traditional IRA.• Fair Market Value (Prior December 31 value).

When is the Form Mailed? • For Traditional and Roth IRA Contributions ONLY: This form must be mailed to the IRA Owner by the IRA Custodian on or before May 31 of the year following the tax year for which the contribution was made.

• For SEP and SIMPLE IRA Contributions: This form must be mailed to the IRA owner by May 31 of the year following the calendar year in which the contribution was made, regardless of the tax year the contribution was for.

• For conversions, rollovers and recharacterizations into an IRA: This form must be mailed to the IRA owner by May 31 of the year following the calendar year in which the rollover contribution, conversion contribution or recharacterization was made, regardless of the tax year the rollover contribution, conversion or recharacterization was for.


• This form is not included with your Federal tax return, as it will often arrive after you file your taxes. However, you should still verify the accuracy of the information on the form and contact your IRA Custodian immediately if there is a discrepancy. Also, keep this form with your tax records.

IRS Form 1099-R

IRS Form 5498

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Reporting Purpose: • Nondeductible contributions to Traditional IRA.• Distributions from a Traditional IRA or SIMPLE IRAs previously made with nondeductible contributions.• Distributions from a Roth IRA.• Conversions to a Roth IRA.• Recharacterizations of a Roth or Traditional IRA.• Distributions from Coverdell Education Savings Accounts.


• This form is not obtained from your IRA custodian; it is obtained through the IRS or your tax preparer and must be submitted with your Federal tax return (if applicable). You should keep a copy of this form with your tax records.

Reporting Purpose: This form is used to pay penalty taxes associated with IRA distributions in such instances as, but not limited to, early distributions, excess contributions, and failure to take a Required Minimum Distribution. The IRS 10 percent penalty tax for early distributions is calculated on this form.


This form is not obtained from your IRA custodian; it is obtained through the IRS or your tax preparer and must be sent with your Federal tax return when required. You should keep a copy of this form with your tax records.Information about tax forms may be obtained from IRS Publication 590A and 590B or calling 1-800-TAX-FORMS, or visiting the IRS website at WWW.IRS.gov

IRS Form 8606

IRS Form 5329

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Th e Internal Revenue Service (IRS) requires IRA custodians and trustees to use IRS Form 1099-R to report distributions from Individual Retirement Accounts (IRAs). Generally, this form must be sent to IRA owners (and benefi ciaries if applicable) by January 31 (or, if furnished to the IRA owner as part of a consolidated reporting statement, February 15) following the year to which

the report applies. Morgan Stanley will also provide a copy of this form to the IRS.

Th is brochure provides you with a detailed description and information on how to read the form. IRA aggregated distribution amounts (per account) that total $10 or less will not receive a Form 1099-R unless federal and/or state tax withholding was applied.

Understanding IRS Form 1099-R

ATTACHMENT A1

IRS Forms

SAMPLE FORM 1099-R

34



1099-R Box-by-Box DescriptionsThe IRS provides an explanation of each box on the back of the Form 1099-R. The IRS also provides detailed explanations in the Form 1099-R Instructions, available at IRS�gov�

PAYER’S information is Morgan Stanley’s.

RECIPIENT’S information is your personal information.

1 Gross Distribution — This amount may represent a distribution, direct rollover, a conversion to a Roth IRA, or a recharacterization of either an IRA contribution or Roth conversion you made during the year before income tax or other deductions were withheld.

2a Taxable Amount — If Morgan Stanley is able to determine the taxable amount of a distribution, as indicated in box 2b, the amount in box 2a denotes the part of the distribution that is generally taxable. If Morgan Stanley cannot determine the taxable amount, as indicated in box 2b, the amount in box 2a generally is the same as the amount in box 1 for IRA distributions. The firm may exclude certain rollover distributions and certain qualified plan distributions from the amount in box 2a, even if the taxable amount cannot be determined�

2b Distribution Box — If the first box is checked, Morgan Stanley is unable to

determine the taxable amount of the distribution. Morgan Stanley generally cannot determine the taxable amount of IRA distributions. If the second box is checked, the distribution is a total distribution that closed the account.

If the distribution depletes the IRA, the Total distribution box will be checked.

NOTE: Morgan Stanley does not compute the taxable amount of IRA distributions. Therefore, except as provided by IRS regulations or other guidance, Morgan Stanley reports the gross IRA distribution amount in Form 1099-R Box 2a, Taxable amount, and also checks Taxable Amount Not Determined in Box 2b. Clients taking Roth distributions or distributions involving nondeductible contributions may use IRS Form 8606, Nondeductible IRAs, to calculate and report their taxable amount.

*NOTE: To view the IRS instructions for form 1099-R, visit the IRS website at https://www.irs.gov/pub/irs-pdf/i1099r.pdf

3 Capital Gain — In general, this box only pertains to distributions you have taken from a qualified plan. If you received a lump-sum distribution from a qualified plan and were born before January 2, 1936, you may be able to elect this amount as a capital gain on Form 4972.

4 Federal Income Tax Withheld — The total amount of federal income tax withheld from the distribution. Include this amount on the income tax return as tax withheld.

5 Employee Contribution — In general, this box only pertains to distributions you have taken from a qualified plan. It will display your investment in the contract, if any, recovered tax-free this year.

6 Net Unrealized Appreciation (NUA) —This box only pertains to distributions you have taken from a qualified plan. The NUA is taxed only when sold unless you choose to include it in your gross income this year.

7 Distribution Codes — The IRS provides an explanation of each distribution code on the back of the Form 1099-R sent to you. The IRS also provides detailed explanations in the Form 1099-R Instructions,* available at IRS.gov. When distributions of differing types occur in the same year, Morgan Stanley reports each distribution type on a separate Form 1099-R. Where more than one distribution code applies to the same distribution, Morgan Stanley may use two codes on the same Form 1099-R, as provided by IRS instructions. (see Appendix A for full list of Distribution Codes).

8 Annuity Contract — This box only pertains to distributions you have taken from a qualified plan. If part of the distribution you received was an annuity contract, the value of the contract displays. Periodic payments from the annuity contract are taxable at the time they are received.

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9a Distribution Percentage — This box only pertains to distributions you have taken from a qualified plan. If a total distribution was made to more than one person, the percentage displayed is the amount received�

9b Total Contributions — This box only pertains to distributions you have taken from a qualified plan. This is your total investment in the contract.

10 This box only pertains to distributions you have taken from a qualified plan. If an amount is reported in this box, see instructions on Forms 5329 and 8606.

11 This box only pertains to distributions you have taken from a qualified plan. Enter the first year you made a contribution to the designated Roth account reported on this form.

When IRA owners elect to roll over an IRA distribution to another IRA within 60 days of receipt, the trustee/custodian of the receiving IRA issues IRS Form 5498 to report the rollover contribution. Clients may consult the IRS or a qualified tax professional for instructions on reporting indirect IRA to IRA rollovers as nontaxable.

12 -17 State or Local Income Tax Information — These boxes are provided for convenience only and are not required to be completed for the IRS. If state or local income tax was withheld from the distribution, this information may display part of the distribution subject to state and/or local tax.

1 Morgan Stanley reports a Roth IRA distribution as a Qualified Distribution from a Roth IRA (Code Q in Form 1099-R Box 7) when our records show that the initial contribution date is at least five years prior to the distribution and the distribution is for one of the following qualifying reasons:• Attainment of age 59½• Death• Qualifying DisabilityWhen there is NOT an initial contribution date on file that is at least five years prior to the distribution, but the distribution is for one of the three qualifying reasons above, Morgan Stanley reports a Roth IRA distribution as a Roth IRA Distribution, Exception Applies (Code T in Form 1099-R Box 7).When the distribution is NOT for one of the qualifying reasons above, Morgan Stanley reports any Roth IRA distribution as an Early Distribution from a Roth IRA, No Known Exception (Code J in Form 1099-R Box 7), unless provided otherwise by IRS regulations. 2For clients under age 59½, Morgan Stanley reports a 72(t) distribution as an Early Distribution, Exception Applies (Code 2 in Form 1099-R Box 7).For clients over age 59½, Morgan Stanley reports a 72(t) distribution as a Normal Distribution (Code 7 in Form 1099-R Box 7).

Appendix A1099-R Box 7 Distribution Codes

Codes Definition

1 Early Distribution, No Known Exception (in most cases, under 59½)

22 Early Distribution, Exception Applies (under age 59½)

3 Disability as defined under section 72(m)(7) of the Internal Revenue Code

4 Death

72 Normal Distribution (including Qualified Charitable Distribution (QCD))

8 Excess Contributions plus earnings taxable in current year

E Distributions under Employee Plans Compliance Resolution System (EPCRS)

G Direct Rollover from an employer sponsored qualified plan and direct payment from an IRA to an employer sponsored qualified plan (other than an IRA based plan)

G4 Direct Rollover due to Death from an employer sponsored qualified plan (other than an IRA based plan)

J1 Roth IRA Early Distribution – No Known Exception

K Distribution of IRA assets not having a readily available Fair Market Value (FMV)

N Recharacterized IRA contribution made for current year

P Excess Contributions plus earnings taxable in prior year

Q1 Roth IRA Qualified Distribution

R Recharacterized IRA contribution made for prior year

S Simple IRA Early Distribution within first 2 years of first contribution – No Known Exception

T1 Roth IRA Distribution – Exception Applies

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Th e Internal Revenue Service (IRS) requires IRA custodians and trustees to use IRS Form 5498 to report contributions, including individual and spousal contributions (including excess contributions, even if removed timely), catch-up contributions, Employer and Employee Deferral contributions to business IRAs (including Simplifi ed Employee Pension (SEP), Salary Reduction Simplifi ed Employee Pension (SAR-SEP), and Savings

Incentive Match Plan for Employees (SIMPLE)), rollover contributions, Roth conversion contributions, and recharacterization contributions. IRA custodians and trustees are also required to use IRS Form 5498 to report certain information about required minimum distributions (RMDs), and the fair market value (FMV) of the IRA account.

Th e Form 5498 is required to be issued by May 31 annually for the preceding tax

year. Th is allows the custodian or trustee to report prior-year individual contributions made by April 15 in the tax year for which they apply. Individual tax payers do not fi le Form 5498 with their income tax returns.

Th is brochure will provide you with detailed descriptions and information on how to read the form. If you wish to review the full instructions provided by the IRS, please visit the IRS website at https://www.irs.gov/pub/irs-pdf/f5498.pdf.

Understanding IRS Form 5498

ATTACHMENT A2

IRS Forms

SAMPLE FORM 5498

37



5498 Box-by-Box DescriptionsThe IRS provides an explanation of each box on the back of the Form 5498. The IRS also provides detailed explanations in the Form 5498 Instructions, available at IRS�gov�

Trustee’s or Issuer’s information is Morgan Stanley’s.

Participant’s information is your personal information.

1 IRA Contributions — This box will show the IRA contributions you made for the current year, including those contributions made through April 15 (or tax filing deadline, if April 15 is a weekend or holiday) of the following year, which you designated to us as a prior-year contribution at the time of the contribution.

2 Rollover Contributions — This box will show any rollover, including a direct rollover to a Traditional IRA or Roth IRA, or a qualified rollover contribution to a Roth IRA you made in the current

year. It does not show any amounts you converted from your Traditional IRA, SEP IRA, or SIMPLE IRA to a Roth IRA.

3 Roth IRA Conversion Amount — This box will show the amount converted from a Traditional IRA, SEP IRA or SIMPLE IRA to a Roth IRA in the current year.

4 Recharacterization Contributions —This box will show amounts recharacterized from transferring any part of the contribution (plus earnings) from one type of IRA to another.

5 Fair Market Value (FMV) of Account —This box will show the FMV of all investments in your account at year-end. However, if a decedent’s name is shown, the amount reported may be the FMV on the date of death. If the FMV shown is zero for a decedent, the executor or administrator of the estate may request a date-of-death value from the custodian or trustee.

6 Life Insurance Cost Included in Box 1 — This box will show the amount allocable to the cost of life insurance (for endowment contracts only). You will subtract this amount from your allowable IRA contribution included in box 1 to compute your IRA deduction.

7 IRA Type — This box will show the kind of IRA reported on this form.

8 SEP Contributions — This box will show SEP contributions made in the current year, including contributions made in the current year for the prior year. It will not include contributions made in the future year which will be applied towards the contributions for the current year. If the contribution was made by your employer, do not deduct it on your income tax return. If you made the contributions as a self-employed person (or partner) the contribution may be deductible.

9 SIMPLE Contributions — This box will show SIMPLE contributions made in the current year, including contributions made in the current year for the prior year. It will not include contributions made in a future year which will be applied toward the contributions for the current year. If this contribution was made by your employer, do not deduct on your income tax return. If you made the contributions as a self-employed person (or partner) the contribution may be deductible�

10 Roth IRA Contributions — This box shows Roth IRA contributions you made in the current year, including those contributions made through April 15 (or tax filing deadline if April 15 is a weekend or holiday) of the following year which you designated to us as a prior-year contribution at the time of the contribution. Do not deduct this contribution on your income tax return.

38



11 Required Minimum Distribution —If this box is checked, you must take an RMD in the next year and all future years. An RMD may be required even if the box is not checked. Discuss this with your tax advisor. If you do not take the RMD when required, you are subject to a 50 percent excise tax penalty on the amount not distributed�

12a & 12b Required Minimum Distribution Date and Amount —This box may show the date by which the RMD amount in box 12b must be distributed to avoid the 50 percent excise tax penalty on the undistributed amount for next year. If box 11 is checked and there is no amount in box 12b, the custodian or trustee must provide you the amount or offer to calculate the amount in a separate statement by January 31 of the following year.

13a, 13b & 13c Postponed Contribution —These boxes are only used to report certain postponed contributions related to taxpayers who either (a) served in designated combat zones, qualified hazardous duty areas or in direct support areas, or (b) were covered by an extension of the contribution due date because of a federally designated disaster. Box 13a shows the amount of any postponed contribution made in the current year for a prior year. Box 13b shows the year to which the postponed contribution in box 13a was credited. Box 13c: If you made a postponed contribution due to an extension of the contribution due date because of a federally designated disaster, it will show the code FD.

For additional information, including a list of locations within the designated

combat zones, qualified hazardous duty areas, and direct support areas, see Pub. 3. For updates to the list of locations, go to www.irs.gov/form5498.

14a & 14b Repayments — This box shows the amount of any repayment of a qualified reservist distribution or federally designated disaster withdrawal repayment. Box 14b will show the code QR for the repayment of a qualified reservist distribution or code DD for repayment of a federally designated disaster distribution�

15a & 15b Fair Market Value (FMV) — Box 15a will show the FMV of the investments in the IRA that are specified in the categories identified in box 15b.

39



The following codes show the type(s) of investments held in your account for which the FMV is required to be reported in box 15a.

A Stock or other ownership interest in a corporation that is not readily tradable on an established securities market.

B Short- or long-term debt obligation that is not traded on an established securities market.

C Ownership interest in a limited liability company or similar entity (unless the interest is traded on an established securities market).

D Real estate�

E Ownership interest in a partnership, trust or similar entity (unless the interest is traded on an established securities market).

F Option contract or similar product that is not offered for trade on an established option exchange.

G Other asset that does not have a readily available FMV.

H More than two types of assets (listed in A through G) are held in this IRA.

40



The following is a summary of the general state income tax withholding rules for IRA distributions. Your withholding options may be impacted by certain exceptions, limitations, or additional requirements which are not reflected below. It is important that you consult with your tax advisor to determine the state tax withholding rules which pertain to your individual circumstances.

ATTACHMENT B

State Tax Withholding

If Your Legal State of Residence Is: Your Withholding Options Are:1

Iowa, Maine, Massachusetts, Nebraska, District of Columbia If you elect to have federal income tax withheld, Morgan Stanley is required to withhold state income tax. You may provide a percentage or flat dollar amount equal to or greater than your state’s minimum tax withholding requirements.

North Carolina, Oklahoma, Oregon, Vermont If you elect to have federal income tax withheld, Morgan Stanley is required to withhold state income tax unless you elect no state income tax withholding. You may provide a percentage or flat dollar amount equal to or greater than your state’s minimum tax withholding requirements. If you are a resident of North Carolina, you must complete the NC-4P Form prior to your distribution.

Arkansas, California, Michigan State income tax withholding is required on distributions from your IRA regardless of whether or not you elect federal income tax withholding; you may elect no state income tax withholding. If you are a resident of Michigan, you must complete the MIW-4P form to opt out of withholding.

Alabama, Arizona, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, Montana, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia, Wisconsin

State income tax withholding is voluntary and Morgan Stanley will withhold upon your request. You may provide a percentage or flat dollar amount to be withheld.

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

State income tax withholding is not available.

If Your Legal State of Residence Is: Your Minimum State Income Tax Withholding Rate Is:1

Arkansas 3%

North Carolina 4%

Michigan 4.25%

Iowa, Maine, Nebraska, Oklahoma 5%

Massachusetts 5.1%

Oregon 8%

District of Columbia 8.95%

California 10% of federal income tax amount withheld

Vermont 24% of federal income tax amount withheld

Alabama, Arizona, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, Montana, New Jersey, New Mexico, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, West Virginia, Wisconsin

There is no minimum percentage rate. You may provide any percentage amount.

Please Note: Some states may require a minimum state income tax withholding amount, which is not reflected in this document.Morgan Stanley is providing this general information to assist you in understanding state tax withholding requirements. Morgan Stanley obtained this information from sources believed to be reliable; however, the accuracy or timeliness may not be guaranteed due to the fact that the state tax law are subject to change and interpretation. Please contact your tax advisor regarding your state’s withholding laws and your tax withholding elections�1Based on state tax rules in effect as of January 2016.

41



Earnings may be distributed before reaching age 59½, without the 10 percent IRS premature distribution penalty tax, if it is used for one of the following Life Event Exceptions:

• Qualifying first-time homebuyer expenses ($10,000 lifetime limit)• Due to a qualifying disability• Distributed to beneficiaries on IRA holder’s death• Used for qualified higher education expenses¹ incurred by the IRA holder or certain family members• Used to cover unreimbursed medical expenses exceeding 10 percent of adjusted gross income• Used to purchase medical insurance after receiving unemployment compensation for more than 12 weeks (subject to certain

conditions)• Made under a qualifying Substantially Equal Periodic Payments schedule (“72(t) payments”)• A qualified reservist distribution• A qualified disaster distribution• Made pursuant to a qualifying IRS levy.

ATTACHMENT C

Life Event Exceptions

¹ Note: The term “qualified higher education expenses” includes tuition, fees, books, supplies and equipment for the attendance of a student at any eligible education institution, as well as room and board if the individual is at least a half-time student (subject to certain limits). Qualified higher education expenses include expenses relating to undergraduate or graduate-level courses.

42



ATTACHMENT D

Distributions at a Glance

Pre-Age 59½, No Life Event Exception

Purchase of First Home ($10,000 Lifetime Cap)

Qualifying Higher Education Expenses

Qualifying Medical Expenses, Health

Insurance and 72(t) Payments

Qualifying Disability and Death

Type of IRA Income Taxes

Penalty Taxes

Income Taxes

Penalty Taxes

Income Taxes

Penalty Taxes

Income Taxes

Penalty Taxes

Income Taxes

Penalty Taxes

Traditional IRA (Deductible, Nondeductible, SEP, SAR-SEP and Rollover)

Yes Yes Yes No Yes No Yes No Yes No

SIMPLE IRA Yes Yes* Yes No Yes No Yes No Yes No

ROTH IRA before age 5 Years

Yes on earnings

onlyYes

Yes on earnings

onlyNo

Yes on earnings

onlyNo

Yes on earnings

onlyNo

Yes on earnings

onlyNo

ROTH IRA after age 5 Years

Yes on earnings

onlyYes No No

Yes on earnings

onlyNo

Yes on earnings

onlyNo No No

Note: In general, only the taxable portion of the distribution is subject to income taxes and the penalty tax.

* If a SIMPLE IRA owner distributes assets from their SIMPLE IRA before having participated in the plan for at least two years, the penalty tax rate for the premature distribution will be 25 percent, unless the individual has a Life Event Exception identified in Appendix B of this booklet.

IRA DISTRIBUTION AT A GLANCE

Distribution Reasons

43



BRIEF SUMMARY OF BENEFICIARY DISTRIBUTION RULES

ATTACHMENT E

Distribution Rules

Beneficiary Owner Dies Before the Required Beginning Date (RBD)1

Owner Dies on or After the Required Beginning Date (RBD)1

Spouse — Inherited IRA Spouse’s Life ExpectancySpouse’s Life Expectancy (or, if longer, the remaining life expectancy of the deceased IRA owner, reduced by one each year)

Spouse — Transfer to own IRA

Permitted Permitted

Non-Spouse Beneficiary — Inherited IRA

Beneficiary’s Life Expectancy reduced by one each year; Five-Year Rule* is also an option

Beneficiary’s Life Expectancy reduced by one each year (or, if longer, the remaining life expectancy of the deceased IRA owner, reduced by one each year)

Multiple Designated Beneficiaries (i.e., individuals only) — Inherited IRA

Individual’s Life Expectancy if the account is divided by December 31 of the year after death into inherited IRAs for the individual; otherwise, life expectancy of the oldest beneficiary

Individual’s Life Expectancy if the account is divided by December 31 of the year after death into Inherited IRAs for the individual; otherwise, life expectancy of the oldest beneficiary

Multiple Beneficiaries (includes individuals and legal entities, such as trusts, estates, charities or foundations)

If legal entities receive a single-sum payment by September 30 of the year after death or the account is divided by December 31 of the year after death into Inherited IRAs for the individuals, the individuals may refer to Multiple Designated Beneficiaries above; otherwise, Five-Year Rule*

If legal entities receive a single-sum payment by September 30 of the year after death or the account is divided by December 31 of the year after death into Inherited IRAs for the individuals, individuals may refer to Multiple Designated Beneficiaries above; otherwise, Five-Year Rule*

Trust Meeting Certain IRS Requirements** — Inherited IRA

Life Expectancy of oldest trust beneficiary reduced by one each year

Life Expectancy of oldest trust beneficiary reduced by one each year (or, if longer, the remaining life expectancy of the deceased IRA owner, reduced by one each year)

Trust (Not Meeting Certain IRS Requirements) — Inherited IRA

Five-Year Rule* Remaining term-certain period of the IRA owner

Charity — Inherited IRA Five-Year Rule* Remaining term-certain period of the IRA owner

Estate — Inherited IRA Five-Year Rule* Remaining term-certain period of the IRA owner

* The Five-Year Rule requires a beneficiary to deplete the IRA during a five-year period that begins on the December 31 following the death of the IRA holder. The entire account must be distributed by the end of the fifth year.** See “Non-Spousal Beneficiaries, Non-Living Entities.”1 Required Beginning Date (RBD) — The RBD is April 1 of the year after the IRA owner attained (or would have attained) age 70½. Post-death distributions from Roth IRAs are calculated under the same rules as for Traditional IRAs whose participants die before the RBD.

44



REQUIRED MINIMUM DISTRIBUTIONS RULES AT A GLANCE

ATTACHMENT F

RMD Rules

Account Type Requirement Late Penalty

Traditional IRA, Spousal IRA, SEP IRA, SAR-SEP IRA, SIMPLE IRA, Rollover IRA

Age 70½ or older, attained prior to the current year: Client must fulfill the annual RMD by December 31 of the current year. Age 70½ attained during the current year: Client must take the first RMD by April 1 of the following year. If a client decides to delay the first Required Minimum Distribution until April 1 of the following year, the client will have two RMDs in one tax year.

If a client does not take the RMD on time, the penalty is 50 percent of the undistributed portion of the amount that should have been distributed. Note: An RMD notification page is included in each quarterly IRA statement.

Please speak with your tax professional regarding your distribution options and tax liability.

45



ROLLOVER CHART

ATTACHMENT G

Rollover Chart

Source: www.irs.govNOTE: Effective December 18, 2015, participants are permitted to roll over eligible amounts from certain retirement plans (including Traditional IRAs, 401(k) plans, 403(b) annuities and governmental 457(b) plans) to SIMPLE IRAs, but only after the end of the two-year waiting period beginning on the date the individual first received a contribution in any SIMPLE IRA plan maintained by the same employer. Rollovers between two SIMPLE IRAs are not subject to the two-year waiting period.

46



UNIFORM TABLE FOR DETERMINING LIFE EXPECTANCY FACTOR

Age Factor Age Factor

70 27.4 93 9.6

71 26.5 94 9.1

72 25.6 95 8.6

73 24.7 96 8.1

74 23.8 97 7.6

75 22.9 98 7.1

76 22 99 6.7

77 21.2 100 6.3

78 20.3 101 5.9

79 19.5 102 5.5

80 18.7 103 5.2

81 17.9 104 4.9

82 17.1 105 4.5

83 16.3 106 4.2

84 15.5 107 3.9

85 14.8 108 3.7

86 14.1 109 3.4

87 13.4 110 3.1

88 12.7 111 2.9

89 12 112 2.6

90 11.4 113 2.4

91 10.8 114 2.1

92 10.2 115+ 1.9

Life Expectancy Tables

47



IRA OWNER AGE70 71 72 73 74 75 76 77

45 39.4 39.4 39.3 39.3 39.2 39.2 39.1 39.146 38.6 38.5 38.4 38.4 38.3 38.3 38.2 38.247 37.7 37.6 37.5 37.5 37.4 37.4 37.3 37.348 36.8 36.7 36.6 36.6 36.5 36.5 36.4 36.449 35.9 35.9 35.8 35.7 35.6 35.6 35.5 35.550 35.1 35.0 34.9 34.8 34.8 34.7 34.6 34.651 34.3 34.2 34.1 34.0 33.9 33.8 33.8 33.752 33.4 33.3 33.2 33.1 33.0 33.0 32.9 32.853 32.6 32.5 32.4 32.3 32.2 32.1 32.0 32.054 31.8 31.7 31.6 31.5 31.4 31.3 31.2 31.155 31.1 30.9 30.8 30.6 30.5 30.4 30.3 30.356 30.3 30.1 30.0 29.8 29.7 29.6 29.5 29.457 29.5 29.4 29.2 29.1 28.9 28.8 28.7 28.658 28.8 28.6 28.4 28.3 28.1 28.0 27.9 27.859 28.1 27.9 27.7 27.5 27.4 27.2 27.1 27.060 27.2 27.0 26.8 26.6 26.5 26.3 26.261 26.3 26.1 25.9 25.7 25.6 25.462 25.4 25.2 25.0 24.8 24.763 24.5 24.3 24.1 23.964 23.6 23.4 23.265 22.7 22.566 21.8SPOUSE BENEFICIARY AGE

JOINT LIFE EXPECTANCY TABLES

IRA Owner Age: 70-77 | Spouse Beneficiary Age: 45-66

IRA OWNER AGE78 79 80 81 82 83 84 85

53 31.9 31.8 31.8 31.8 31.7 31.7 31.7 31.654 31.0 31.0 30.9 30.9 30.8 30.8 30.8 30.755 30.2 30.1 30.1 30.0 30.0 29.9 29.9 29.956 29.3 29.3 29.2 29.2 29.1 29.1 29.0 29.057 28.5 28.4 28.4 28.3 28.3 28.2 28.2 28.158 27.7 27.6 27.5 27.5 27.4 27.4 27.3 27.359 26.9 26.8 26.7 26.6 26.6 26.5 26.5 26.460 26.1 26.0 25.9 25.8 25.8 25.7 25.6 25.661 25.3 25.2 25.1 25.0 24.9 24.9 24.8 24.862 24.6 24.4 24.3 24.2 24.1 24.1 24.0 23.963 23.8 23.7 23.6 23.4 23.4 23.3 23.2 23.164 23.1 22.9 22.8 22.7 22.6 22.5 22.4 22.365 22.4 22.2 22.1 21.9 21.8 21.7 21.6 21.666 21.7 21.5 21.3 21.2 21.1 21.0 20.9 20.867 21.0 20.8 20.6 20.5 20.4 20.2 20.1 20.168 20.1 20.0 19.8 19.7 19.5 19.4 19.369 19.3 19.1 19.0 18.8 18.7 18.670 18.5 18.3 18.2 18.0 17.971 17.7 17.5 17.4 17.372 16.9 16.7 16.673 16.1 16.074 15.4SPOUSE BENEFICIARY AGE


IRA OWNER AGE86 87 88 89 90 91 92 93

61 24.7 24.7 24.6 24.6 24.6 24.5 24.5 24.562 23.9 23.8 23.8 23.8 23.7 23.7 23.7 23.763 23.1 23.0 23.0 22.9 22.9 22.9 22.9 22.864 22.3 22.2 22.2 22.1 22.1 22.1 22.0 22.065 21.5 21.4 21.4 21.3 21.3 21.3 21.2 21.266 20.7 20.7 20.6 20.5 20.5 20.5 20.4 20.467 20.0 19.9 19.8 19.8 19.7 19.7 19.6 19.668 19.2 19.2 19.1 19.0 19.0 18.9 18.9 18.869 18.5 18.4 18.3 18.3 18.2 18.2 18.1 18.170 17.8 17.7 17.6 17.6 17.5 17.4 17.4 17.371 17.1 17.0 16.9 16.9 16.8 16.7 16.7 16.672 16.5 16.4 16.3 16.2 16.1 16.0 16.0 15.973 15.8 15.7 15.6 15.5 15.4 15.4 15.3 15.274 15.2 15.1 15.0 14.9 14.8 14.7 14.6 14.675 14.6 14.5 14.4 14.3 14.2 14.1 14.0 13.976 13.9 13.8 13.7 13.6 13.5 13.4 13.377 13.2 13.1 13.0 12.9 12.8 12.778 12.6 12.4 12.3 12.2 12.179 11.9 11.8 11.7 11.680 11.3 11.2 11.181 10.7 10.682 10.1

SPOUSE BENEFICIARY AGE

IRA Owner Age: 86-93 | Spouse Beneficiary Age: 61-82IRA OWNER AGE

94 95 96 97 98 99 10069 18.0 18.0 18.0 18.0 17.9 17.9 17.970 17.3 17.3 17.2 17.2 17.2 17.2 17.171 16.6 16.5 16.5 16.5 16.4 16.4 16.472 15.9 15.8 15.8 15.8 15.7 15.7 15.773 15.2 15.1 15.1 15.1 15.0 15.0 15.074 14.5 14.5 14.4 14.4 14.3 14.3 14.375 13.9 13.8 13.8 13.7 13.7 13.6 13.676 13.2 13.2 13.1 13.1 13.0 13.0 12.977 12.6 12.6 12.5 12.5 12.4 12.4 12.378 12.0 12.0 11.9 11.9 11.8 11.8 11.779 11.5 11.4 11.3 11.3 11.2 11.2 11.180 11.0 10.9 10.8 10.7 10.7 10.6 10.681 10.5 10.4 10.3 10.2 10.1 10.1 10.082 10.0 9.9 9.8 9.7 9.6 9.6 9.583 9.5 9.4 9.3 9.2 9.2 9.1 9.084 9.0 8.9 8.8 8.7 8.6 8.585 8.5 8.4 8.3 8.2 8.186 8.0 7.9 7.8 7.787 7.5 7.4 7.388 7.0 6.989 6.6

SPOUSE BENEFICIARY AGE


RETJLET (10/2012)

48



SINGLE LIFE EXPECTANCY TABLE

Age Life Expectancy

0 82.4

1 81.6

2 80.6

3 79.7

4 78.7

5 77.7

6 76.7

7 75.8

8 74.8

9 73.8

10 72.8

11 71.8

12 70.8

13 69.9

14 68.9

15 67.9

16 66.9

17 66

18 65

19 64

20 63

21 62.1

22 61.1

23 60.1

24 59.1

25 58.2

26 57.2

27 56.2

Age Life Expectancy

28 55.3

29 54.3

30 53.3

31 52.4

32 51.4

33 50.4

34 49.4

35 48.5

36 47.5

37 46.5

38 45.6

39 44.6

40 43.6

41 42.7

42 41.7

43 40.7

44 39.8

45 38.8

46 37.9

47 37

48 36

49 35.1

50 34.2

51 33.3

52 32.3

53 31.4

54 30.5

55 29.6

Table I

(For Use by Beneficiaries)

49



Age Life Expectancy

56 28.7

57 27.9

58 27

59 26.1

60 25.2

61 24.4

62 23.5

63 22.7

64 21.8

65 21

66 20.2

67 19.4

68 18.6

69 17.8

70 17

71 16.3

72 15.5

73 14.8

74 14.1

75 13.4

76 12.7

77 12.1

78 11.4

79 10.8

80 10.2

81 9.7

82 9.1

83 8.6

Age Life Expectancy

84 8.1

85 7.6

86 7.1

87 6.7

88 6.3

89 5.9

90 5.5

91 5.2

92 4.9

93 4.6

94 4.3

95 4.1

96 3.8

97 3.6

98 3.4

99 3.1

100 2.9

101 2.7

102 2.5

103 2.3

104 2.1

105 1.9

106 1.7

107 1.5

108 1.4

109 1.2

110 1.1

111 and over 1.0

Table I (Continued)

50



60-Day Rollover — A rollover where the client is in actual or constructive receipt of the distributed retirement assets and, no later than the 60th calendar day following the day on which the participant/IRA owner received the distributed assets, the client deposits the distributed assets into eligible retirement plan. Individuals may only make one IRA-to-IRA rollover transaction during any 12-month period, no matter how many IRAs or the types of IRAs (for example, Traditional, Roth, Inherited, Savings Incentive Match Plan for Employees (SIMPLE) or Simplified Employee Pension (SEP) IRAs) the individual owns.

72(t) Distributions — IRA owners may elect to receive 72(t) payment distributions to avoid the 10 percent premature distribution penalty tax on distributions taken before age 59½. The payments are calculated using an IRS-approved method. This is only an exception to the premature distribution penalty tax and not a reason for tax-free withdrawals.

After-Tax Contribution — For Traditional IRAs, these contributions are referred to as nondeductible contributions, which are contributions for which the IRA owner does not take an income tax deduction on his or her federal income tax return.

Age 59½ — This is the sixth month after your 59th birthday. Distributions taken after age 59½ are not subject to an IRS early distribution penalty tax of 10 percent.

Age 70½ — This is the sixth month after your 70th birthday. For Traditional IRAs, this is the date which triggers Required Minimum Distributions (RMD), with the ability for you to postpone your first RMD until April 1 of the year following the year you turn 70½. This date is referred to as your required beginning date.

Beneficiary — The individual or entity designated by the IRA owner or by default based on the IRA plan document as the party that will inherit the IRA assets after the IRA owner’s death.

Deductible Contribution — Tax deductible contributions are those made to a retirement account that may reduce the amount of income subject to tax, if the contributions meet Internal Revenue Services (IRS) qualifications.

Default Beneficiary — If you fail to identify a beneficiary on your IRA account in writing, the IRA Custodian’s account opening documents will contain language which will default your beneficiary to certain relatives or your estate.

Direct Rollover — A direct rollover is a means of moving an eligible rollover distribution from an eligible employer-sponsored retirement plan to another eligible retirement plan (e.g., IRA). Because the individual does not take actual or constructive receipt of the assets and the assets are deposited into another eligible retirement plan (e.g., IRA), the distribution is considered a direct rollover and is not subject to federal income tax withholding.

Distribution — Amount paid from a retirement plan as a reportable transaction. A distribution can be processed as a direct rollover or paid to the participant.

Early Distribution — Distribution from your IRA before you reach age 59½. Early distributions are subject to an early distribution penalty tax of 10 percent, unless an exception applies. For distributions from a SIMPLE IRA, the penalty tax will increase to 25 percent if the distribution is taken before the end of the two-year holding period.

Early Distribution Penalty — Distributions that occur before the retirement account owner reaches age 59½ are subject to an early distribution penalty (or excise tax) of 10 percent, unless an exception applies. For a list of the exceptions, see Early Distribution Penalty Exception. For SIMPLE IRAs, the penalty is increased to 25 percent if the distribution occurs before the end of the two-year period.

Early Distribution Penalty Exceptions — A condition under which the early distribution penalty does not apply. For example: Death, disability, IRS Tax Levy.

Indirect Rollover — An indirect rollover occurs when an individual receives an eligible rollover distribution and within 60 days recontributes it to an eligible plan. Individuals may only make one IRA-to-IRA rollover transaction during any 12-month period, no matter how many IRAs or the types of IRAs (for example, Traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) or Simplified Employee Pension (SEP) IRAs) the individual owns.

Inherited IRA — An IRA that is established for the non-spouse beneficiary of the IRA owner. It is also commonly used to refer to an IRA that is established for a spouse beneficiary who chose not to elect to treat the IRA as his/her “own IRA.” The Inherited IRA must be maintained in the name of the decedent and the beneficiary, and the tax identification number of the beneficiary.

In-Kind — Distribution in-kind is a payment made in the form of securities or other property, rather than in cash.

Joint Life and Last Survivor Expectancy Table — Used to calculate RMD amounts for the participant, but only if the spouse of the participant is the sole primary beneficiary and is more than 10 years younger than the participant.

Lump-Sum Distribution — A single distribution of the account owner’s entire balance from their IRA within a single tax year.

Modified Adjusted Gross Income (MAGI) — This figure represents adjusted gross income modified by taking into account certain adjustments to income and disregarding certain deductions or exclusions. MAGI is used to determine (a) deductibility of Traditional IRA

Glossary

51



contributions made by active participants in employer-sponsored retirement plans and (b), with certain additional modifications to MAGI, eligibility to contribute to Roth IRAs.

Nondeductible Contribution — Nondeductible contribution is an IRA contribution that an IRA holder designates as non-deductible either by choice or because of ineligibility to make a deductible contribution. A Traditional IRA holder does not take a deduction for this contribution. A nondeductible contribution may be made to the extent that a deductible contribution is not made. The Traditional IRA holder must file a Form 8606, Nondeductible IRAs, if a nondeductible contribution is made. Nondeductible contributions are the only type of contributions that can be made to Roth IRAs.

Ordering Rules for Roth IRA — When a distribution from a Roth IRA is not a qualified distribution, the ordering rules help to determine the portion of the nonqualified distribution that is subject to income tax and/or the early distribution penalty tax. Distributions from a Roth IRA occur in the following order: (a) from regular contributions first; (b) after all regular contributions have been distributed, from conversion amounts, on a first-in-first-out basis; and (c) after all conversion amounts have been distributed, from earnings.

Plan Agreement — The plan agreement sets forth the terms and conditions of the IRA and is the controlling contract.

Prohibited Transaction — A transaction that would result in loss of the tax-deferred status of the IRA and/or the imposition of an excise tax on the disqualified person(s) who participated in the prohibited transaction.

Qualified Charitable Distribution (QCD) — A distribution from an IRA account when the account holder is age 70½ or older that is excluded from the holder’s income for federal income tax purposes as a result of meeting certain requirements. Refer to IRC § 408(d)(8), IRS Notice 2007-7 for requirements.

Recharacterization — Changing a contribution for one type of IRA to another or reversing a Roth conversion contribution, subject to certain conditions and limitations. This may be important for individuals who executed a conversion and the converted assets have suffered a relatively significant loss in value.

Roth Five-Year Holding Period — The “Five-Year Holding Period” for qualified distributions begins on January 1 of the year for which the IRA holder makes the first regular contribution (or, if earlier, in which the holder makes the first rollover or conversion contribution) to any Roth IRA account he or she holds as owner and ends at the end of five full calendar years. Once the “Five-Year Holding Period” has been satisfied with respect to any Roth IRA contribution (regular, conversion, or rollover contribution), it is deemed to be satisfied for all later Roth IRA contributions.

Roth Conversion — Is the process of converting assets in a Traditional IRA to a Roth IRA. A Roth conversion is subject to ordinary income tax. Therefore, except for amounts attributable to after-tax rollovers or nondeductible contributions, the conversion will be taxable to the IRA owner.

Roth IRAs — An individual retirement plan that satisfies certain requirements under the federal tax rules and provides for tax-deferred growth potential and income tax-free qualified distributions if certain conditions are met. Individuals must meet income requirement in order to be eligible to make regular contributions to a Roth IRA.

SAR-SEP IRA — A plan established by business owner/employers for their employees, using SAR-SEP IRA accounts as the tax-deferred investment vehicle. Plan must have been adopted prior to January 1, 1977. However, new employee accounts can be added to existing plans. Contributions may be a combination of employee salary deferral plus an optional employer SEP contribution. SAR-SEP IRA accounts are considered Traditional IRAs.

SEP IRAs — A plan established and 100 percent funded by business owners/employers for their employees, using SEP IRA accounts as the tax-deferred investment vehicle. SEP IRA accounts are considered Traditional IRAs.

SIMPLE IRAs — A plan established by business owners/employers for their employees and funded through a combination of employee salary deferral contributions and an employer match (or nonelective contribution), using SIMPLE IRA accounts as the tax-deferred investment vehicle.

SIMPLE IRA Two-Year Rule — Two-year restriction placed on distributions, transfers, rollovers and conversions to and from SIMPLE IRAs. The two-year period begins on the first day on which contributions made by the individual’s employer are deposited into the individual’s SIMPLE IRA. During the two-year period, no rollovers or transfers can be made to or from a SIMPLE IRA, unless both accounts involved in the rollover are SIMPLE IRAs. Also, the penalty tax for early distributions is increased from 10 percent to 25 percent for early SIMPLE IRA distributions occurring during the two-year period.

Single Life Expectancy Table — Used only by beneficiaries to calculate RMD amounts after the death of the participant.

Spousal IRA — An IRA established by a nonworking spouse, or spouse who has little or no eligible compensation for IRA purposes, to receive a contribution made by his/her working spouse.

Tax Deductible — Tax deductible contributions are those made to a retirement account that may reduce the amount of income subject to tax, if the contributions meet Internal Revenue Services (IRS) qualifications.

Traditional IRAs — An individual retirement plan that satisfies certain requirements under the federal tax rules and provides for tax-deferred growth potential, deductible contributions (subject to certain limitations, and distributions that are subject to ordinary


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income tax (except to the extent the distribution is treated as a return of after-tax contributions). Traditional IRAs include Rollover, SEP and SAR-SEP IRAs (SAR-SEP Plans must have been adopted prior to January 1, 1997; however, new employee accounts can be added to existing plans).

Trustee-to-Trustee Transfer — Refers to a transfer, where the assets are moved non-reportably between accounts of the same type directly by the custodian, without

the IRA account owner taking actual or constructive possession of the assets.

Uniform Lifetime Table — Used to calculate RMD amounts for the participant. This is used in all cases, except where the Joint Life and Last Survivor Expectancy Table can be used.

Withholding Tax (Tax Withholding) — An amount deducted from the distribution by the IRA custodian and remitted directly to

the IRS as a prepayment of the tax liability owed by the IRA holder. In general, distributions from IRAs are subject to 10 percent federal income tax withholding, unless the payee elects out. Certain distributions may be subject to mandatory or other distribution requirements, e.g., distributions to nonresident aliens.

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.

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