60-Day Rollover Rule Question

[Gadgetfreak]

Here is an interesting question:

A key employee age 72 wants to take $1 million out of his account. The Plan allows for this in-service distribution so that is not a problem. If he gets a direct distribution, taxes are withheld but he has 60 days to rollover to an eligible recipient Plan (i.e. IRA, other Plan, etc.). Can he change his mind and roll it back into the original Plan???

He can't take a loan because the limit is $50k. He actually wants to use the funds for a bridge loan. I can't find anything to say that he can or can't. I can see arguments either way. Any ideas? Thanks.

[Belgarath]

Yes, he can. Assuming of course that the plan permits incoming rollovers. Of course, he'll have to come up with the 20% that was withheld to roll back into the plan or he'll be taxed on it.

An additional wrinkle to be aware of. Since he's over the RMD age, if he hasn't taken a RMD for 2012 yet, the regulations provide that any distribution coming out of the plan is first considered to be the RMD. Therefore this amount would technically be ineligible for rollover. So he may want to withdraw his RMD first, or, he can just plan on rolling back in the amount in excess of the RMD - whatever works.

[Gadgetfreak]

Great! Thank you so much for the quick response. I suspected he was allowed to do it but thanks for the reminder about RMD.

[ESOP Guy]

RMD issue aside for this conversation.

If he really wants to do this and he really wants to minimize the tax withholding issue couldn’t he do the following?

1) Take the money from plan and roll it to an IRA

2) Take money from IRA, which doesn’t have 20% withholding

3) Roll back into IRA within 60 days, or maybe even the original plan (I would have to think about it, but it seems like it would be a conduit IRA to plan concept.)

More paperwork as he has to open an IRA for the sole purpose of putting money in it for a day or two. Maybe he could use an existing IRA-- depends on exact facts.

Obviously, he would need to take the RMD first with this set of actions.

[BG5150]

Belgarath,

How could he take the money and then roll it back into the plan?

A plan would have provisions to accept r/o's from IRA's or other plans, but not money that went to the participant but was otherwise eligible for rollover. You have to roll over from an approved vehicle. His pocket (I would thins) isn't one of them.

[Belgarath]

Bg - sorry, but I simply don't agree. The Code and regs do not require that the rollover into a 401(a) plan be by direct rollover only - only that an "eligible rollover distribution" may be rolled to an "eligible retirement plan" within the requisite timeframes. Now, the plan may not permit it, which is a separate issue altogether - hence my comment that the plan must permit it.

[masteff]

If he has any after-tax contributions, that'll make it slightly messier (refer to your special tax notice on which parts of after-tax monies can and cannot be rolled over to a QP via the 60-day rule).

[ETA Consulting LLC]

Bg - sorry, but I simply don't agree. The Code and regs do not require that the rollover into a 401(a) plan be by direct rollover only - only that an "eligible rollover distribution" may be rolled to an "eligible retirement plan" within the requisite timeframes. Now, the plan may not permit it, which is a separate issue altogether - hence my comment that the plan must permit it.

"Like"

[mbozek]

Here are the IRS pronouncements on this question to the extent that you wish to follow them:

pub 575 P 26 col 1 " If you withdraw cash from a qualified plan you can generally defer tax by rolling it over to another qualified plan or traditional IRA."

Pub 590 P 22 col 2: Rollover from one IRA to another. "You can withdraw tax free all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another IRA. Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA."

For those who like safe harbors the obvious route is a direct rollover from the Q plan to an IRA, withdrawal from the IRA, redeposit into the IRA within 60 days and then a rollover back to the Q plan.

[Belgarath]

Mbozek - granted that there are statements giving the IRS imprimatur to the specific procedural steps that you mention, I still maintain that it is perfectly allowable under the Code/regs to handle in the manner I first mentioned. Do you agree? Disagree?

[mbozek]

Mbozek - granted that there are statements giving the IRS imprimatur to the specific procedural steps that you mention, I still maintain that it is perfectly allowable under the Code/regs to handle in the manner I first mentioned. Do you agree? Disagree?

Reg. 1.402©-2 Q3(a) states that "Unless specifically excluded, an eligible rollover distribution means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified plan. Thus, except as specifically provided in Q-4(b) (corrective distributions) any amount distributed to an employee from a qualified plan is an eligible rollover distribution." Q-3(b) excludes distributions that are not eligible for a rollover including periiodic payments, MRDs and after tax amounts but does not exclude distributions from the distributing plan itself.

Q-1(a) provides that any portion of an eligible distribution from a qualified plan may be rolled over to an eligible retirement plan described in IRC 402©(4) which Q-2 defines as a qualified plan or an IRA.

Given the way the reg is constructed I dont see any basis for excluding a plan distribution that is paid to a participant from being an eligible rollover distribution that can be rolled back to the same plan in 60 days because a RO from a qualified plan that is not otherwise excluded under 3(b) or 4(b) is an eligible rollover distribution of an amount credited to the employee in a qualified plan which can be rolled over to the qualified plan that made the distribution because that plan is an elgibile retirement plan.

I dont know why the IRS uses language in pub 575 that differs from Pub 590 but that language does not have the authority of the reg.

[Guest HRNewb]

Hi all

I'm pretty new at administering plans so forgive my stupidity.

Say for example, someone withdraws $5000 from their plan on termination as a taxable and $4000 released net after the 20% tax withholding.

They change their mind and deposit the $4000 into a 401(a) vehicle within the 60 days, why will they be taxed on the $1000 that was withheld if they do not top it back up?

Would that person not be paying $6000 all in all just to receive their $5000 in their account tax free? If they had rolled it over from the get go, no taxes would have been withheld for them to end up with the same $5000 with the receiving plan/account.

I'm confused here

[masteff]

Would that person not be paying $6000 all in all just to receive their $5000 in their account tax free?

They'd get credit for the $1000 of withholding on their next tax return, putting them back at even.

[MoJo]

Hi all

I'm pretty new at administering plans so forgive my stupidity.

Say for example, someone withdraws $5000 from their plan on termination as a taxable and $4000 released net after the 20% tax withholding.

They change their mind and deposit the $4000 into a 401(a) vehicle within the 60 days, why will they be taxed on the $1000 that was withheld if they do not top it back up?

Would that person not be paying $6000 all in all just to receive their $5000 in their account tax free? If they had rolled it over from the get go, no taxes would have been withheld for them to end up with the same $5000 with the receiving plan/account.

I'm confused here

To answer your first question, yes, the person would be taxed on the $1000 "distribution" that was withheld and sent to the IRS as taxes on the $5000 initial distribution. The total amount distributed from the plan is what determines the amount that has to be rolled over in order to avoid the taxes. The $1000 withheld is still consider the persons money, as it is now a "credit" for their benefit against any tax liability they ultimately have, and it can be used for those taxes (based on other income earned) or refunded to them, if they've over-withheld for the year. If the person can come up with the extra $1000 to roll back into a apprpriate vehicle (so that the total roll-over back is $5000), then that person would "owe" no tax on the initial distribution, and receive (possibly - depending on their tax situation) a refund of the $1000 withheld when they file their tax return for the year. If they can't come up with the $1000, then the $1000 will be treated as a taxable distribution, and their income will increase by the $1000, but they also get credit for the $1000 already withheld, and may receive a refund of some (or all, depending on their tax situation) when they file their tax return.