IRA - Rollover COntributions

[Guest AJ Milano]

A retired participant in a 401(k) plans turns age 70 ½ on 5/25/2001, making his 2001 RMD date 4/1/2002. The participant wants to rollover his vested balance in his 401(k) to an IRA. Is his company required to pay him out his 2001 RMD before he can rollover his 401(k) to an IRA? I say that the 2001 Required Minimum Distribution is not an eligible rollover distribution. The Plan Consultant is saying that the company can rollover the full amount into the IRA and then take the 2001 from the IRA before 4/1/2002. Which was is correct, and where can I find the IRS code to back it up. Any help is greatly appreciated.

Sincerely, Anthony J. Milano

[mbozek]

There is no correct answer to your question. This problem is the result of two contradictory provisions in existing IRS regs. First Reg 1.402c-2(B) states that an eligible rollover distribution cannot include an amount subject to a minimum distribution. Presumably a person terminating employment in the year that age 70 1/2 is attained is required to make a distribution for that year. However, proposed IRS regulations on minimum distributions 1.401(a)(9)-1B-1A states that the mimimum distribution requirement can be satisified by distributing the entire interest of the employee by the required beginning date. The transfer of a participant's interest under a direct rollover is recorded as a distribution for tax purposes under a 1099. This should allow the tax free rollover of the entire lump sum to an IRA. The participant has until 4/1/02 to take the minimum distribution.

This issue is significant to the participant who would prefer to earn tax deferred interest on the minimum distribution as long as possible. Plan administrators are concerned because of the risk that the plan could be disqualified if it allows the participant to rollover a minimum distribution. Plans avoid the problem by paying the minimum distribution to the participant directly, less 20% withholding and rolling over the balance of the account to an IRA. The participant then takes the minimum distribution check and rolls it over to the IRA and waits until 4/1 to take the minimum distribution and everyone is satisified, sort of.

[Guest reg_h2b]

I think your right and the plan consultant is wrong.

Here's a quote from the Roth Final Regs. explanation of a Roth Conversion:

"...However, the proposed regulations under sections 401(a)(9) and 408(a)(6) and (B)(3) provide that the first year for which distributions are required under section 401(a)(9) is the year in which the IRA owner reaches age 70 1/2, and that distributions made prior to April 1 of the following calendar year are treated as made for that first year. The regulations under section 402© and the proposed regulations under sections 401(a)(9) and 408(a)(6) and (B)(3) provide that the first amount distributed during a calendar year is treated as a required minimum distribution to the extent that the amount required to be distributed for that calendar year under section 401(a)(9) has not been distributed."

Since a qualified rollover and a Roth conversion are both- in part-

distributions (and then contributions) why wouldn't this Roth conversion logic hold for a qualified rollover.

Note some commentators claim that this IRS interpretation is inconsistent with the Code (i.e. law). This may be but it does look to be grounded in IRS regs.

[Belgarath]

First, I agree that the plan consultant is wrong. But I think this question is addressed quite clearly in the 401(a)(9) regulations. Take a look at 1.401(a)(9)-1, Q&A G-3 which provides guidance for the situation you describe.

[mbozek]

Belgrath I see your point but:

1. the reg u cite is inconsistent with both the statutory language of 401(a)(9) as well as the B-1a reg I cited which only require that the plan distribute the account balance to the participant by year that 70 1/2 is attained,

2. the G-3 reg leads to absurd results if the participant makes more than one transfer in the same tax year because each transfer would be subject to minimum distribution requirements in violation of the 401(a) (9) regs requirement and

(3) is totally irrevalent to the purpose of tax administration because the participant can take the mandatory distribution amount (and 20% withholding) and roll it over to an IRA until April 1 of the year following age 70 1/2.

It seems that most advisors and the IRS have become too focused on the administration of complex rules to deter legal tax avoidance instead of focusing on the only purpose for statutory compliance: that the mrd be distributed by required distribution date. The taxpayer has a perfectly legal right to defer payment of the MRD until that date under 401(a) (9). The G-3 reg does not prevent this; it just requires an extra step by the taxpayer.

[Belgarath]

I guess we'll just have to agree to disagree on this one. I don't see any particular inconsistency here. Is the rule stupid, as you assert? You bet! I agree totally. But I look at the G-3 as a very specific answer to a specific circumstance. I wouldn't want to fight the IRS on this using the argument that it is inconsistent with the B-1a reg. And I don't see it as a hindrance to multiple transfers, either. All you have to do is make sure the minimum distribution requirement has been satisfied by the transferor plan. Once that has been accomplished, you can do as many transfers as you want, with no problem.

But the good thing is, it's Friday! My brain, such as it is, always starts to shift into reverse about this time...

[Guest reg_h2b]

See Reg. 1.402©-2 Q&A-7(a) which gives a clear ordering procedure on the distribution and a clear example.

(These are "regs." not "prop. regs" so they trump anything in the 401(a)(9) Q&A G-3 prop. reg.; but in this case they both seem to come to the same conclusion).

I think one can argue whether this is consistent with the law under 401(a)(9) and congressional intent-- as some have done when this issue applies to Roth conversions-- but then one should be prepared to go to court to make that arguement as it does not have a basis in IRS regs.

[mbozek]

Belgrath- well you are right about friday and that we can agree to disagree--

The IRS is required to issue regulations which are consistent with the statute. The G-3 reg is not only inconsistent with the language of 401(a)(9) but treats taxpayers who roll over their distribution in the year they turn 70 1/2 differently from those who do not.

As to your reason that the administrator has only to follow the mininimum distribution regs I ask what regs.--- The reason participants want a full rollover is that many plans required higher minimum distributions under the old regs which are not applicable to IRAs. Also some custodians require withholding in sucessive transfers for the very same reasons u used to justify the initial witholding.

Finally the whole procedure is a farce because informed participants can avoid distribution by rolloving over the minimunm distribution without any penalty since they are acting in accordance with the law. I would not worry about fighting the IRS on this issue because proposed regs are not enforcable under the law and cannot be used against a taxpayer.

but I enjoyed this discussion.