Is this dangerous?

[Guest Doogie61]

One of my clients has an old PS plan with 1.5 million in it that's been around for many years. Back in calendar 2007 he set up a DB plan and has accumulated about $350K in that plan. Client wants to terminate BOTH plans and roll the proceeds to a Roth IRA, then set up a NEW DB again for 2010 to continue with the big deductions. He's in his early 50's. I say OK for the PS plan, but to terminate the DB just to set up another seems silly.

Is this a wise move?

Thoughts?

[Andy the Actuary]

You should be able to amend the DB plan to max out benefits at 415 if not already being done.

[david rigby]

A few unrelated thoughts:

- Implied in the original question is that this is a one-participant plan. Correct? Does he think that he will have increased investment flexibility in the IRA? I think it is pretty much the same. Perhaps there is some "odd" tax situation encouraging the use of a Roth IRA?

- Watch out for some "odd" advisor making this suggestion, especially if that advisor has in interest in the transaction.

- Don't forget that the creditor protections of a qualified plan are stronger than on an IRA.

[Guest Doogie61]

It's a one man plan....and yes, I can max out the plan for distribution purposes. My concern is how is the IRS gonna look at it when someone sets up a plan for 3 years, terminates that and sets up another right away?

BTW...his financial advisor is his father....also a doctor who feels the ROTH conversion is worth the administrative expense.

[David MacLennan]

Seems like it could be a violation of the permanency rule - one could argue about it anyway. But there are no regs on permanency and as far as I know there is no enforcement. What makes it look worse though is that it was clearly a device to get around the in-service distribution rules. Just in case, do what you need to protect yourself . . .

Another issue is the new plan will have MASD calcs for the 415 limits on the new plan, and we have no regs and no standard of practice for MASD's. Tip: keep the NRA in the new plan at 62 or less and it will simplify the MASD calcs in the new plan for the 415 dollar limit. If the 415 comp limit governs you have a more complex calc with MASD's . . .

[david rigby]

...and yes, I can max out the plan for distribution purposes.

It's possible that AtA's comment has a second meaning: why terminate? That is, he may have meant to max out the plan for benefit, not for distribution, to the extent affordable and permissible.

Based on your second comment, it appears someone is recommending this action based on estimates of about future tax rates, and administrative expenses are not a significant focus. Just a guess.