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IRA rollover to Employer Plans


Guest Dan Gould
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Guest Dan Gould

I have just received an interpretation (NOT from the IRS) that Section 642 of EGTRRA does not allow IRA assets to be used to purchase service credit, but merely to rollover into an employer's retirement plan's 401(k) plan.

Is that the reading of that provision that you'all get?

Thanks

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I agree with you that Section 642 only allows rollovers, not service credit purchases.

The new provision (Section 647) that allows tax-deferred money to be used in a trustee-to-trustee transfer for service purchase only applies to 403(B) and 457 plans. I.e., IRAs and qualified plans may not be the source of funds for this provision.

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Guest Harvey Carruth

To expand the statement made by Dan Gould a bit, Section 642(a) of EGTRRA authorizes rollovers from an IRA into a qualified trust [401], a qualified annuity [403(a)], a 457(B) account, or a 403(B) account.

MGB is correct in stating that Section 647 authorizes trustee-to-trustee transfers to purchase permissive service credit only from 403(B) or 457(B) plans.

However, my understanding is that if an individual has a 403(B) or a 457(B) account, then IRA funds could first be rolled over into the 403(B) or 457(B) account and then could be used to purchace permisive service credit via trustee-to-trustee transfer. Hence, using this two step process, IRA funds could, in fact, be used to purchase permissive service credit.

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Guest Dan Gould

Thanks both of you for your analyses. In the case of the two step process [a rollover to 403(B) which could then be transferred to the 401 (a) to purchanse service credit] do you think or know if the IRS is providing a specific procedure or interpretation that says the two step (dance) is authorized?

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I'm sorting through this and am confused :confused: , I note that this has been discussed before. See "IRA rollovers to buy DB service credit " (prior thread)

I think I agree with Carol's thoughts on this when Dan asked earlier about 642:

"Sorry, Dan, you are right. The special provision which permits in-service transfers (SECTION 647) from 403(B) or 457 plans to defined benefit plans to purchase service credit does not apply to IRAs. However, since most IRAs permit distributions at any time, you could use an IRA rollover (SECTION 642) to purchase service credit."

This makes the most sense to me, especially if the alternative is a two step dance ending up in the same place.

Dan - you've asked the question twice, and the consensus in the threads seem to differ - it seems to me that IRA rollovers made under Section 642 could be used for service purchases. Any thoughts?

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Guest Dan Gould

Thanks for noticing that there is some inconsistency about how people understand the implications of these IRA transfers provisions.

The position--as I understand it-- of the Colorado Pubilc Employees Retirement Association (COPERA) is taking on this, at the present time, is that Conduit IRAs that have as their source of funds prior contributions in 403(B) and 457 Plan can be used to purchase service credit, BUT traditional IRAs cannot be so used. They are saying that they will accept traditional IRA transfers into their 401(K) Plan as a DC transfer, but those funds in the 401(k) from a traditional IRA source cannot be used to purchase service credit.

The basis for their position is, apparently, that because the 403(B) and 457 Plans are cited in this section allowing purchase of Service credit, but IRAs are not, IRA funds, even if transferred into one of these cited other Plans, is not expressly permitted.

They have said that if, and only if, the IRS provides a procedure or clarification that provides expressly for IRA funds transfers "for the benefit of..." to includes the use of these funds to purchase service credit, that they also will permit this use.

In my opinion, COPERA is reading the EGTRRA IRA transfer (provision 647) much too literally. (By analogy, if some Rule says I can exchange my $100 bill for other currency, but the Rule doesn't say specifically twenty dollar bills, then the correct interpretation of the Rule is that it doesn't allow twenty dollar bills in exchange for my $100 bill.)

BUT, I am not a tax attorney, and it may be that the CODE is meant to be interpreted that narrowly and literally.

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Insofar as public DB pension plans do not allow for lump-sum settlement options, or for that matter, payout options based on life expectancy; under what circumstances would it be in the employee's best interest to use money from a 403(B)/457 to purchase allowable prior service from the governmental Defined Benefit plan?

Best wishes,

Joel L. Frank

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Guest Dan Gould

I may be misunderstanding your post, but COPERA gives an employee when they terminate service at retirement age the options to take out their with contributions with interest (currently 7%) plus a partial match from the employer's contribution with interest in a lump sum. I don't know if that counts as a lump sum settlement as you refer to, though.

Also, with the benefits formula used in Colorado (2.5% X years of service X the average of the highest three years of salary) for one's life, and which also has an annual 3.5% inflation adjustment, purchasing service credit can be, for some people, a very good "investment."

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Dear Dan,

Doesn't the purchase of prior service credit go to increase the defined benefit (annuitized portion) of the retirement benefit, the part of the accrued benefit that may not be taken out in a lump-sum?

Best wishes,

Joel L. Frank

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Dan,

A great website. The Public Employees' Retirement Association of Colorado (PERA) places the cost of the purchase in the employee's individual account. The settlement option decision for the individual's account is made at retirement, at which time he/she can deside to effectuate a rollover or annuitize. The employee, therefore is not making any irrevocable decisions at the time of purchase. This is not the case, however, with the vast number of public plans which compel lifetime annuitization. In those situations the prior service purchase is irreversible.

Best wishes,

Joel L. Frank:confused:

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