Correction for 70-1/2 Rollover to IRA

[Guest Judy S]

A non-owner participant terminated in 2006 and turned 70-1/2 on 4/27/07.

She withdrew her entire balance on 4/9/07 and rolled 100% to an IRA.

It is my understanding that any distribution in her first distribution calendar year (2007) must include her 401(a)(9) minimum which cannot be rolled over. Therefore, she has an ineligible rollover contribution that must be treated as an IRA contribution for 2007, and should be reported by the IRA custodian on Form 5498 as a regular IRA contribution, not as a rollover contribution. If she exceeds the $5,000 maximum IRA contribution for 2007, she must withdraw the excess to avoid a penalty tax, though this seems unlikely since the minimum is only $470.

The distributing plan should issue a 1099-R reporting the amount rolled over less her 2007 minimum with distribution code G, and a second 1099-R reporting the minimum amount as taxable with code 7.

This is what seems right to me but I would like to hear from others that may have had this situation or that are confident about how to handle it. Thanks very much.

[Bird]

I think you're right on all counts. We had one of these earlier and pretty much considered it "no harm no foul" as long as she pulled the money out, or at least as long as we reported it properly on the 1099-Rs and told her to pull it out.

To be honest, we didn't consider and/or didn't bother with advising the custodian that it wasn't all eligible for R/O for 5498 purposes. I've found IRA custodians to be pretty inflexible when it comes to reporting and I'm not sure that they would pay attention to correspondence saying "BTW, not all of that rollover was eligible." I think the primary purpose of the form is to confirm that a reported rollover on a 1099-R occurred; I'm not quite sure what, if anything, happens if the 5498 amount is greater than the 1099-R, but I think it would be easy enough to explain if needed.

[jevd]

If she turned 70 1/2 in 2007, no traditional IRA contribution is allowed. The entire amoount of the excess rollover plus earnings ( the amount of the RMD from the QP) must be removed.

[Guest Judy S]

Thank you both. I forgot about the prohibition on contributing to a traditional IRA when you reach age 70-1/2. So the solution is to write to the participant and tell her to withdraw the minimum contribution to avoid a 6% penalty tax for excess contributions. We also have to get Nationwide, where the money is, to issue 2 1099-R's rather than 1 which could be more difficult to accomplish.