OK to rollover contributions and earnings from a tax-deferred annuity?

[Guest Melissa Winslow]

I have a client who has cashed out a tax-deferred annuity. He would like to invest in an IRA. Can he roll the entire balance (basis + earnings)? Are there any time restrictions for this?

[John Olsen]

Yes, a distribution from a 403(B) plan - OTHER THAN A REQUIRED MINIMUM DISTRIBUTION - may be rolled over to an IRA.

See Tax Facts, Q. 379,380, parts of which are quoted below:

A rollover must be completed within sixty days after receipt of the distribution. IRC Sec. 402©(3). Furthermore, unless a rollover is carried out by means of a direct rollover (a Trustee to Trustee transfer] the distribution amount will be subject to a mandatory income tax withholding rate of 20%. IRC Sec. 3405©(1).

If a participant receives an eligible rollover distribution that was subject to the 20% withholding rate, the 20% withheld will be includable in income (to the extent required by Section 402(a) or Section 403(B)(1)) even if the participant rolls over the remaining 80% of the distribution within the 60-day period (see Q 386). See Reg. §§1.402©-2, A-11, 1.403(B)-2, A-1. Because the amount withheld is considered to be an amount distributed under Section 402©, the participant may add an amount equal to the 20% withheld to the 80% he has received, resulting in a rollover of the full distribution amount. The 10% premature distribution penalty (see Q 219, Q 417) may apply to the amount withheld where only the remaining 80% of the distribution is rolled over. Reg. §1.402©-2, A-11.

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John L. Olsen, CLU, ChFC

Olsen Financial Group

St. Louis, MO

314-909-8818

[Guest Dan Anderegg]

Melissa, when I hear the term tax-deferred annuity I think of a nonqualied annuity contract. If this tax-deferred annuity is nonqualified. the proceeds cannot be rolled into an IRA. A regular contribution($2,000 subject to limits) is the only way to get nonqualified money into an IRA or Roth.

If the tax-deferred annuity is funding the 403(B), I would agree with John's comments.

I hope my two cents, helps out.

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Daniel Anderegg, CLU,ChFC