Putting lump sum into IRA to avoid income tax ok?

[travelrick]

My sister, age 80, left employment at a large company 15 years ago and received a lump sum from their profit sharing plan. What she didn't realize was that they also had a pension plan and after moving lost all contact with the company. Now, 15 years later, she finds out about it and has received a lump sum of $120,000 for accumulated pension and interest, together with a monthly pension for the remainder of her life.
After considering the income tax hit on the lump sum, within 60 days she put the money in a rollover IRA in hopes of avoiding income tax. She will of course take the required RMD each year. Wondering if this will work or if she will have future problems/penalties with the IRS.

[Big_Hitter]

she needs to talk to an accountant

[rodi]

Since she's no longer employed, and past age 70.5, can she even contribute to an IRA?

I agree with Big Hitter - she needs to talk to an accountant.

[euro]

Quote:

Originally Posted by rodi Since she's no longer employed, and past age 70.5, can she even contribute to an IRA? I agree with Big Hitter - she needs to talk to an accountant.

It probably depends on the specific plan, but my former megacorp definitely allows a rollover into an IRA. I don;t think being employed or having an income has anything to do with the rollover. What I don't know is what the impact is of her not taking any RMDs for the last 10 years or whether she'd have to take 10 year's worth when she rolls it over

[Gill]

It wouldn't appear to me she could roll this over into an IRA. What she has received is no different than monthly pension payments which can't be rolled into an IRA. She is receiving the monthly payments in arrears plus interest to bring her current. This would be fully taxable in the year received. She needs to withdraw the funds placed in the IRA plus any earnings on those funds.

Disclaimer: Although I am an attorney and a CPA, I'm not your attorney or CPA, and I am merely expressing an opinion which shouldn't be relied upon.
Bruce

[Walt34]

Quote:

Originally Posted by MBMiner It wouldn't appear to me she could roll this over into an IRA. What she has received is no different than monthly pension payments which can't be rolled into an IRA. She is receiving the monthly payments in arrears plus interest to bring her current. This would be fully taxable in the year received. She needs to withdraw the funds placed in the IRA plus any earnings on those funds.

I think he's right from what I know about it.

Treat it as a windfall, pay the taxes due, and take a round-the-world cruise or whatever other luxury she would enjoy.

[kaneohe]

For another opinion, consider posting at fairmark.com in the retirement forum and look for a reply from Alan S.

[pb4uski]

Quote:

Originally Posted by MBMiner It wouldn't appear to me she could roll this over into an IRA. What she has received is no different than monthly pension payments which can't be rolled into an IRA. She is receiving the monthly payments in arrears plus interest to bring her current. This would be fully taxable in the year received. She needs to withdraw the funds placed in the IRA plus any earnings on those funds. Disclaimer: Although I am an attorney and a CPA, I'm not your attorney or CPA, and I am merely expressing an opinion which shouldn't be relied upon. Bruce

+1 Plus, she should talk to a tax practitioner to see if there is any potential relief in her situation... I don't think there is... in the good old days there was income averaging but now it is only for farmers and fishermen.

I think the most likely result it she pays the tax and then goes forward to try to enjoy her after-tax windfall.

[RE2Boys]

I seriously doubt that she can take pension payments, even if 15 years was in one check, and roll it into an IRA, especially as she will continue to receive monthly checks. But strongly recommend she talk to a CPA.

Now if she had received a lump sum distribution that represented her entire interest in her pension, she may be able to roll it into an IRA. And if she was born prior to Jan 2, 1936, she may be eligible for the special 10 year lump sum averaging calculation (https://www.irahelp.com/slottreport/...come-averaging).
Check with the CPA first.

Edit to add: Check with CPA immediately. Some choices may not be available if done in a different year, or penalties can be avoided if action taken this year.

[Big_Hitter]

Quote:

Originally Posted by pb4uski +1 Plus, she should talk to a tax practitioner to see if there is any potential relief in her situation... I don't think there is... in the good old days there was income averaging but now it is only for farmers and fishermen. I think the most likely result it she pays the tax and then goes forward to try to enjoy her after-tax windfall.

is there a late distribution penalty on some or all of the back payments? Like a 50% excise tax? How was the 1099 filled out?

[Big_Hitter]

http://www.morningstar.com/advisor/t...50-penalty.htm

[travelover]

Quote:

Originally Posted by Big_Hitter How to Request a Waiver of the RMD 50% Penalty

Not accessible to nonsubscribers.

[Big_Hitter]

Quote:

Originally Posted by travelover Not accessible to nonsubscribers.

sorry about that it worked for me the first time, now I can't get in

[Big_Hitter]

Missed Your IRA's RMD Deadline? Here's What to Do | Fox Business

[euro]

Quote:

Originally Posted by RE2Boys I seriously doubt that she can take pension payments, even if 15 years was in one check, and roll it into an IRA, especially as she will continue to receive monthly checks. But strongly recommend she talk to a CPA. Now if she had received a lump sum distribution that represented her entire interest in her pension, she may be able to roll it into an IRA. And if she was born prior to Jan 2, 1936, she may be eligible for the special 10 year lump sum averaging calculation (https://www.irahelp.com/slottreport/...come-averaging). Check with the CPA first. Edit to add: Check with CPA immediately. Some choices may not be available if done in a different year, or penalties can be avoided if action taken this year.

I agree that she won;t be able to funnel pension payments into an IRA. However, based on the information in the OP, this may be a situation where she has not yet made a decision between LS/rollover or annuitize (because she didn't even know the account existed). So the company just decided to pay it out once they discovered it. It seems possible that there is still time to retroactively affect a rollover then. Worth exploring in my opinion - but I don;t know how the "failure to take the RMD for 10 years" plays out in such circumstances - from the other posts it looks like potential penalties can at least be appealed? Minimally, she'll probably still have to take the whole 10 years worth right now, so that will be a significant chunk

[Gill]

Quote:

Originally Posted by Big_Hitter is there a late distribution penalty on some or all of the back payments? Like a 50% excise tax? How was the 1099 filled out?

You seem to be thinking of failure to take RMD's from an IRA which isn't the case here. Also, she probably wouldn't have received a 1099 yet.
Bruce

[Big_Hitter]

Quote:

Originally Posted by MBMiner You seem to be thinking of failure to take RMD's from an IRA which isn't the case here. Bruce

I'm pretty sure it's the same concept.

Again, I'm not an accountant. Some or all of those back payments may be subject to the 50% excise tax. JS

I'd get on the horn with the plan administrator and ask about the 1099 and any penalties.

PSA: people, this is why you need to make sure you keep a current address with the plan administrator

[RE2Boys]

From the OP, this is not a IRA or 401k but sounded like a defined benefit pension. I don't think RMD are applicable. The penalty I was referring to in my earlier post is the possible contribution to an IRA that may not be allowable. If not taken out this year, I believe there is a 6% yearly penalty for over-contribution to an IRA.

[Big_Hitter]

Quote:

Originally Posted by RE2Boys From the OP, this is not a IRA or 401k but sounded like a defined benefit pension. I don't think RMD are applicable. The penalty I was referring to in my earlier post is the possible contribution to an IRA that may not be allowable. If not taken out this year, I believe there is a 6% yearly penalty for over-contribution to an IRA.

RMDs are definitely applicable to DB plans

check out the regs under IRS 401(a)(9)

[RE2Boys]

Quote:

Originally Posted by Big_Hitter RMDs are definitely applicable to DB plans check out the regs under IRS 401(a)(9)

I stand corrected, RMDs are applicalbe. And there are exceptions/if/buts such as this clip:

Accruals after the First
distribution calendar year may be delayed in their distribution due to
administrative delays, etc.
This will not cause the plan to violate I.R.C. 401(a)(9), as long as the actual
payment of such amount commences as soon as practicable,

All the more reason to consult with a CPA. Also, the IRS has been generous (my office has been quite successful) to abate the penalties for first time start of RMDs.
See for more info: https://www.irahelp.com/slottreport/...-these-3-steps


Not a CPA, but an old retired guy who sits in the back office churning out tax returns 3 months each year for past 15 years.