tax wrinkle - IRA rollovers

[karluk]

I have just discovered that certain types of distributions from qualified retirement plans are not eligible for rollovers into an IRA. I was previously aware that distributions taken to meet post 70 1/2 RMDs were not eligible to be rolled over. But there are other exceptions as well, and I very luckily found out about them before committing a potentially serious tax mistake.

The exceptions, as documented on page 26 of IRS publication 590, are as follows:

http://www.irs.gov/pub/irs-pdf/p590.pdf

Eligible rollover distribution. Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following.
1. A required minimum distribution (explained later under When Must You Withdraw Assets? (Required Minimum Distributions)).
2. A hardship distribution.
3. Any of a series of substantially equal periodic distributions paid at least once a year over:
a. Your lifetime or life expectancy,
b. The lifetimes or life expectancies of you and your beneficiary, or
c. A period of 10 years or more.
4. Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains.
5. A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan.
6. Dividends on employer securities.
7. The cost of life insurance coverage.

Since January, I have been taking a regularly scheduled monthly distribution from my 457 plan to replace my paycheck. I was under the impression that, if I didn't need the money for living expenses, I would be able to roll a distribution into an IRA (being careful, of course, not to exceed the limitation of one rollover per year). I see, however, that this is not allowed. I would be in violation of exception 3c for trying to rollover a substantially equal periodic distribution.

I failed to find any reference to this issue on ER.org, perhaps due to faulty search criteria. Hopefully this post will alert anyone who may be contemplating a similar rollover strategy to carefully research the pertinent IRS regulations ahead of time.

 

[Animorph]

I think 3c applies to a specific documented program, 72t withdrawals or similar. It wouldn't apply just because you happen to be taking the same withdrawal amount each month. That prevents a case where to avoid penalties for withdrawals prior to 59.5 you set up a formalized series of withdrawals but then just roll some of them back into an IRA or Roth IRA because you didn't need them. Kind of defeats the formalized plan if you could just agree to take way more than you need and then roll back whatever you don't need.

 

[karluk]

I think 3c applies to a specific documented program, 72t withdrawals or similar. It wouldn't apply just because you happen to be taking the same withdrawal amount each month.

It is, of course, quite possible that the clear wording of exception 3c means something other than what it appears to mean. It is, I believe, fairly definite that the IRS doesn't think that my particular monthly distributions are eligible for IRA rollovers. That's because my distributions are not subject to mandatory 20% withholding, which they would be if they were eligible for rollover. According to publication 590

Generally, if an eligible rollover distribution is paid directly to you, the payer must withhold 20% of it.
…
Exceptions. The payer does not have to withhold from an eligible rollover distribution paid to you if either of the following conditions apply.
The distribution and all previous eligible rollover distributions you received during your tax year from the same plan (or, at the payer's option, from all your employer's plans) total less than $200.
The distribution consists solely of employer securities, plus cash of $200 or less in lieu of fractional shares.
…
The 20% withholding requirement does not apply to distributions that are not eligible rollover distributions.

My withdrawal rate amounts to about 8% per year. At that rate I will not deplete the funds in the 457 plan for more than ten years (unless I suffer negative investment returns). Hence exception 3c applies to my withdrawals. It's possible I would be eligible for rollovers in the eyes of the IRS if my withdrawal rate exceeded 10% per year. But right now it's lower.

 

[Animorph]

It is, of course, quite possible that the clear wording of exception 3c means something other than what it appears to mean. It is, I believe, fairly definite that the IRS doesn't think that my particular monthly distributions are eligible for IRA rollovers. That's because my distributions are not subject to mandatory 20% withholding, which they would be if they were eligible for rollover. According to publication 590



My withdrawal rate amounts to about 8% per year. At that rate I will not deplete the funds in the 457 plan for more than ten years (unless I suffer negative investment returns). Hence exception 3c applies to my withdrawals. It's possible I would be eligible for rollovers in the eyes of the IRS if my withdrawal rate exceeded 10% per year. But right now it's lower.

It seems somewhat reasonable that any amount taken as a withdrawal may not then be rolled back into a retirement account. I think that is still different than the exceptions listed, since it is any withdrawal, not just part of a substantially equal formalized withdrawal plan.

Are you stuck with your withdrawal payments, or can you cancel one or change the amounts? If not, could you rollover a substantial portion of the balance into an IRA. That would at least shorten the payment period and preserve something in the account.

 

[karluk]

Are you stuck with your withdrawal payments, or can you cancel one or change the amounts? If not, could you rollover a substantial portion of the balance into an IRA.

All of those options are available. I could cancel or modify my monthly distribution or continue the regular distribution while making a one-time partial IRA rollover. I will have to rethink my strategy in view of my new understanding of the IRS regulations. My current withdrawal method isn't as flexible as I expected, but fortunately I'm not locked into it permanently.

 

[Animorph]

IRS Pub 590: Publication 590 (2013), Individual Retirement Arrangements (IRAs)

One rollover per year (IRA's only, using funds sent to you): IRA One-Rollover-Per-Year Rule

Rollover specifics: Rollovers of Retirement Plan and IRA Distributions


Rollover FAQs: IRA FAQs - Rollovers and Roth Conversions

SEPPs: Retirement Plans FAQs regarding Substantially Equal Periodic Payments


Hard to see a difference between a withdrawal and a 60-day rollover.

"
Will taxes be withheld from my distribution?

• IRAs: An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.
• Retirement plans: A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding."

But no taxes withheld from your 457 withdrawals?

 

[Animorph]

"
Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

1. Required minimum distributions,
2. Loans treated as a distribution,
3. Hardship distributions,
4. Distributions of excess contributions and related earnings,
5. A distribution that is one of a series of substantially equal payments,
6. Withdrawals electing out of automatic contribution arrangements,
7. Distributions to pay for accident, health or life insurance,
8. Dividends on employer securities, or
9. S corporation allocations treated as deemed distributions."

Given that you are not in a formal SEPP withdrawal plan, you should be eligible.

The one year waiting period for rollovers do not apply to "plan" rollovers, only those rolling out of an IRA:
"
The one-per year limit does not apply to:

• rollovers from traditional IRAs to Roth IRAs (conversions)
• trustee-to-trustee transfers to another IRA
• IRA-to-plan rollovers
• plan-to-IRA rollovers
• plan-to-plan rollovers"

So no problem taking a small amount of many withdrawals and rolling them into an IRA, providing the withdrawals are rollover eligible.

 

[karluk]

But no taxes withheld from your 457 withdrawals?

The monthly distributions have different withholding rules. I can adjust my withholding to be anything from $0 to any amount I choose, similar to the way I adjusted withholding from my paycheck using a W-4 form. That's the feature I really like about monthly distributions - I can tailor my withholding to match my tax liability instead of getting hit with the mandatory 20%.

 

[robertf57]

I have just discovered that certain types of distributions from qualified retirement plans are not eligible for rollovers into an IRA. I was previously aware that distributions taken to meet post 70 1/2 RMDs were not eligible to be rolled over. But there are other exceptions as well, and I very luckily found out about them before committing a potentially serious tax mistake.

The exceptions, as documented on page 26 of IRS publication 590, are as follows:

http://www.irs.gov/pub/irs-pdf/p590.pdf



Since January, I have been taking a regularly scheduled monthly distribution from my 457 plan to replace my paycheck. I was under the impression that, if I didn't need the money for living expenses, I would be able to roll a distribution into an IRA (being careful, of course, not to exceed the limitation of one rollover per year). I see, however, that this is not allowed. I would be in violation of exception 3c for trying to rollover a substantially equal periodic distribution.

I failed to find any reference to this issue on ER.org, perhaps due to faulty search criteria. Hopefully this post will alert anyone who may be contemplating a similar rollover strategy to carefully research the pertinent IRS regulations ahead of time.

Hold on Cowboy! a 457 is NOT a qualified plan! it is a non-qualified deferred contribution plan. You can roll over qualified distributions from a government 457 plan into an IRA after you are retired or separated from employment under EGTRRA; but not if you are receiving periodic payments or an annuity from the 457 plan.

 

[karluk]

Hold on Cowboy! a 457 is NOT a qualified plan! it is a non-qualified deferred contribution plan. You can roll over qualified distributions from a government 457 plan into an IRA after you are retired or separated from employment under EGTRRA; but not if you are receiving periodic payments or an annuity from the 457 plan.

I'm not certain where you are getting the information to make these assertions, but what you say is directly contradicted by the options offered by my 457 plan. Quoting from the 457 web site:

If you initially elect to receive periodic payments and in the future wish to receive a partial lump-sum payment, you can still receive a partial lump-sum payment from your remaining balance.

Even though what you're saying is probably not completely accurate, I appreciate the input. I stumbled rather badly in the assumptions I made about IRA rollovers, so I plan to consult with the administrators of my 457 plan to find out what my options really are. I was wrong before and may be wrong again. I will report back in this thread if there are more restrictions on IRA rollovers than I currently expect.

 

[karluk]

The 457 plan web site also confirms that I can't make IRA rollovers from my monthly distribution, simply because the payments are expected to last more than ten years. It's also the reason I don't have mandatory 20% withholding:

For periodic payments scheduled to last 10 years or more, your payments are not considered to be eligible rollover distributions. Therefore, participants electing a periodic payment scheduled to last 10 years or more can submit an IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments, to elect withholding that is appropriate for your tax situation.

 

[Bogie]

I didn't see this in the thread but if I have my bank who holds an IRA generate a cashiers check that is written out to the place I want to move the IRA to, is that considered a rollover for purposes of the "once per year" rollover rule?

 

[karluk]

To the best of my knowledge, you should be ok with any kind of rollover that doesn't involve a direct payment to you. This arcane ten year rule and the other exceptions apply only to the "check a month" type of distributions I'm currently receiving.

 

[Bogie]

Thanks. I don't know how elderly people are supposed to avoid these tax traps. Maybe they aren't.

 

[Mulligan]

I didn't see this in the thread but if I have my bank who holds an IRA generate a cashiers check that is written out to the place I want to move the IRA to, is that considered a rollover for purposes of the "once per year" rollover rule?

I am doing this Friday, the old school way. Driving out of town to pick up a Roth IRA cd and transferring to Vanguard. They gave me the directions on how to address the check with my name on it also. This also keeps the bank from withholding that 20%, too.


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[robertf57]

I'm not certain where you are getting the information to make these assertions, but what you say is directly contradicted by the options offered by my 457 plan. Quoting from the 457 web site:



Even though what you're saying is probably not completely accurate, I appreciate the input. I stumbled rather badly in the assumptions I made about IRA rollovers, so I plan to consult with the administrators of my 457 plan to find out what my options really are. I was wrong before and may be wrong again. I will report back in this thread if there are more restrictions on IRA rollovers than I currently expect.

Well, I was getting my information from IRS section 457(a) and (b) and Sec 1.457-1(b). A good place to start for an english language discussion is 457-b - Bogleheads and/or The 4-1-1 On 457 Plans - Forbes . A consultation with the plan administrators is in order I suspect. Also know that the rules vary for government an non-government plans. My understanding remains is you are in an annuitized plan or a withdrawal plan of 10 years or more, you cannot roll those distributions.