List of transactions not eligible for rollover (Question)

[newguy2012]

Can someone explain to me in laymen's terms how this Eligible Rollover Distribution works? Specifically, one of the transactions listed as ineligible for a rollover is where there are a series of substantially equal periodic payments:

1) Does that just mean that if you have a single life annuity and you are in pay status that it cannot be rolled over into a qualified plan?

2) RMD is listed too. Maybe if someone could help me wrap my mind around the concept of RMD, RBD, etc I would be able to understand this one more. I am assuming that if you get a RMD that it cannot be rolled over. Or, does it apply when certain funds have been marked as a RMD (before the distribution)? I don't even know if I am asking the right questions.

Any help would be very much appreciated. I have many more questions today and in the months to come. I am hoping that you guys will be my teachers. It's not that I do not research these issues, it's that I like to learn things in a way where I could explain it to the average person.

[SoCalActuary]

Here is a half-hearted explanation of intent in the law:

Participants were given lump sum payments and had no good way to avoid the taxation.

Congress response was to allow rollover of those funds for future retirement payments.

But regular annuity payments are what Congress expected participants to receive from these plans.

So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits.

RMD is just one form of that regular annuity payment.

Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

[ESOP Guy]

In regards to a RMD the point of that law is to make you take money out of the tax deferred bucket and pay taxes on it. The fear congress had was the very rich could retire and have enough money to never take their money out of their IRAs and 401(k)s etc. And thus they would never pay taxes on that money in their life time.

And since you can pass IRAs and 401(k) money on to say very young grandkids it could be a very long time before the gov't gets what it sees as their money.

So they force a ®equired (M)inimum (D)istribution that one has to pay taxes on it.

[newguy2012]

Here is a half-hearted explanation of intent in the law:

Participants were given lump sum payments and had no good way to avoid the taxation.

Congress response was to allow rollover of those funds for future retirement payments.

But regular annuity payments are what Congress expected participants to receive from these plans.

So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits.

RMD is just one form of that regular annuity payment.

Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

That completely makes sense. Your "half-hearted explanation" just helped me to understand the thing at a fundamental level. Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted?

[newguy2012]

In regards to a RMD the point of that law is to make you take money out of the tax deferred bucket and pay taxes on it. The fear congress had was the very rich could retire and have enough money to never take their money out of their IRAs and 401(k)s etc. And thus they would never pay taxes on that money in their life time.

And since you can pass IRAs and 401(k) money on to say very young grandkids it could be a very long time before the gov't gets what it sees as their money.

So they force a ®equired (M)inimum (D)istribution that one has to pay taxes on it.

Wow, you guys are just knocking these out of the park. I get it now. No longer is RMD just an intellectual concept, I get how (and why) it is used in the real world.

Awesome.

[SoCalActuary]

Here is a half-hearted explanation of intent in the law:

Participants were given lump sum payments and had no good way to avoid the taxation.

Congress response was to allow rollover of those funds for future retirement payments.

But regular annuity payments are what Congress expected participants to receive from these plans.

So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits.

RMD is just one form of that regular annuity payment.

Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

That completely makes sense. Your "half-hearted explanation" just helped me to understand the thing at a fundamental level. Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted?

Most typically, this occurs when a job change or plan termination event comes up. The participant is not yet ready for living off their retirement funds, but they are forced to take the money.

Not all are forced, either. In some situations, the participant is very concerned about leaving their money with old employers and want to have better control over the investments by rolling it into their own account.

[newguy2012]

Here is a half-hearted explanation of intent in the law:

Participants were given lump sum payments and had no good way to avoid the taxation.

Congress response was to allow rollover of those funds for future retirement payments.

But regular annuity payments are what Congress expected participants to receive from these plans.

So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits.

RMD is just one form of that regular annuity payment.

Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

In regards to a RMD the point of that law is to make you take money out of the tax deferred bucket and pay taxes on it. The fear congress had was the very rich could retire and have enough money to never take their money out of their IRAs and 401(k)s etc. And thus they would never pay taxes on that money in their life time.

And since you can pass IRAs and 401(k) money on to say very young grandkids it could be a very long time before the gov't gets what it sees as their money.

So they force a ®equired (M)inimum (D)istribution that one has to pay taxes on it.

Since you guys were so good at answering that question, I wonder if you have any ideas on how to put these qualified retirement plans in my head. I am thinking-meta cognitive. I have been going back and forth. Here are the options I came up with:

I could:

1) Learn all the points of law, starting with 401 and organize in my mind that way, breaking it up between the types of plans; or

2) I could go over a pre-approved plan adoption agreement and outline each section and concept and learn it that way--and expland on the concepts as I begin to draft IDPs; or

3) I could just outline the 2011 cumulative list, adding sample language and explanations for each rule (and maybe outline the prior CL for cycle B plans (2006 cumulative list just to get a more recent historical perspective, etc).

I work in document compliance. The guys are giving me time to learn this stuff, so it is no real pressure on me. I just want to learn it fast and learn it at a fundamental level. I want to move up quickly here.

Thanks in advance.

[newguy2012]

Here is a half-hearted explanation of intent in the law:

Participants were given lump sum payments and had no good way to avoid the taxation.

Congress response was to allow rollover of those funds for future retirement payments.

But regular annuity payments are what Congress expected participants to receive from these plans.

So there was no reason to delay taxation on the intended purpose of the plans - paying retirement benefits.

RMD is just one form of that regular annuity payment.

Hope this gives you some understanding of intent here. And welcome to BenefitsLink.

That completely makes sense. Your "half-hearted explanation" just helped me to understand the thing at a fundamental level. Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted?

Most typically, this occurs when a job change or plan termination event comes up. The participant is not yet ready for living off their retirement funds, but they are forced to take the money.

Not all are forced, either. In some situations, the participant is very concerned about leaving their money with old employers and want to have better control over the investments by rolling it into their own account.

But couldn't they choose not to take a lump sum (assuming the amount was over 5k)?

[david rigby]

Also note that the 70-1/2 RMD is absolute for an IRA (or combination of IRAs if the individual has more than one). Different for a qualified retirement plan (pension, profit-sharing, 401k, etc); typically, those plans specify that distribution must begin by the later of 70-1/2 or severance of employment, except for EEs who are "5% owners".

[SoCalActuary]

Code section 3405e and the regulations and interpretations are the resources you will need.

The original intent - protecting participants from premature taxation - has had new layers of complexity added.

So now a participant can elect to keep their funds from distribution, except in a few factual situations.

Plan termination is one of those. Amount balance under $5,000 is another. RMD is another.

But annuity payments just do not look or act like an eligible rollover distribution.

[newguy2012]

Also note that the 70-1/2 RMD is absolute for an IRA (or combination of IRAs if the individual has more than one). Different for a qualified retirement plan (pension, profit-sharing, 401k, etc); typically, those plans specify that distribution must begin by the later of 70-1/2 or severance of employment, except for EEs who are "5% owners".

I did not know that about the IRA. In theory, the qualified plan could allow all non-5% owners to work way past 70 1/2 without the RMD, correct? I wonder if what would happen if the plan has a "5% owner RMD provision" but is silent on that. Is there a default rule or would the plan just fail to be qualified?

[ESOP Guy]

If you want to learn the fundamentals and build from there I would see if your employer will send you to one of the fundamentals classes these guys offer. They are about as good as it gets.

Also, once you attend you can get signed up for their e-mail updates. Maybe you can get them without attending.

But their one and two day fundamental courses would be a good place to start. They tend to do a good job of documenting where in the code or regs they are getting what they are saying so you can base your research off of that.

http://www.relius.net/products/seminarspension.aspx

And "yes" just about every plan allows a non 5% owner who is working to not take an RMD. You will always find RMD language in the document as it will not get approved by the IRS without it.

[newguy2012]

If you want to learn the fundamentals and build from there I would see if your employer will send you to one of the fundamentals classes these guys offer. They are about as good as it gets.

Also, once you attend you can get signed up for their e-mail updates. Maybe you can get them without attending.

But their one and two day fundamental courses would be a good place to start. They tend to do a good job of documenting where in the code or regs they are getting what they are saying so you can base your research off of that.

http://www.relius.net/products/seminarspension.aspx

And "yes" just about every plan allows a non 5% owner who is working to not take an RMD. You will always find RMD language in the document as it will not get approved by the IRS without it.

Ok, thanks. Actually, I am signed up for their three-day seminar in Atlanta next month, "401(k) and other qualified plans" It seems though they are not going to cover much DB stuff. But, I plan to take one of their achived webinars on DB plans.

I will go to all of the pertinent seminars. I'm just thinking about how to put all of this info in my head, how to categorize it in the best way.

[frizzyguy]

Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted?

"If I take the annuity, I could have a stable stream of income for the rest of my life...bbbbbuuuuttttttt if I take the lump sum, I could buy a boat!!!"

(Can you tell that I get excited when I get when client's ask me this question. Also, welcome to benefitslink New Guy. You aren't by chance Lance Wallbach, are you?)

[ESOP Guy]

(This might be the long version of Frizzy's comments)

I would add the more lump sums being taken now is caused by the the increase in DC plans. They are not required to offer an annuity so they don't. To be honest even those that do offer it no one takes them. I can count over my 20 years in this business the number of times someone took an annuity out of a DC plan on one hand. Everyone understands a lump sum of money. An annuity takes more thought to understand.

As long as I am on my soap box....

This is one of the least talked about reasons DB plans died in my opinion. I worked for 14 years for a company that had a DB plan. I can't tell you how many times I had a co-worker tell me they are leaving for a "higher paying job" and when you asked them they went for a job that paid a few grand more a year, but had no DB plan and the 401(k) plan with no match. I doubt they were making more money on a total compensation basis. But a promise of an life annuity when you are 65 vs a couple grand today most people take the couple grand today. They know what the couple of grand is worth they have no idea what a life annuity at 65 is worth, so it is for all practical purposes worthless to them.

Off soap box.

[newguy2012]

Was there a reason that participants were receiving more lump sums than usual? I thought they could defer for as long as they wanted?

"If I take the annuity, I could have a stable stream of income for the rest of my life...bbbbbuuuuttttttt if I take the lump sum, I could buy a boat!!!"

(Can you tell that I get excited when I get when client's ask me this question. Also, welcome to benefitslink New Guy. You aren't by chance Lance Wallbach, are you?)

Yes I can frizzy. Thanks for that. I am not Lance Wallbach. Who is he?

[newguy2012]

(This might be the long version of Frizzy's comments)

I would add the more lump sums being taken now is caused by the the increase in DC plans. They are not required to offer an annuity so they don't. To be honest even those that do offer it no one takes them. I can count over my 20 years in this business the number of times someone took an annuity out of a DC plan on one hand. Everyone understands a lump sum of money. An annuity takes more thought to understand.

As long as I am on my soap box....

This is one of the least talked about reasons DB plans died in my opinion. I worked for 14 years for a company that had a DB plan. I can't tell you how many times I had a co-worker tell me they are leaving for a "higher paying job" and when you asked them they went for a job that paid a few grand more a year, but had no DB plan and the 401(k) plan with no match. I doubt they were making more money on a total compensation basis. But a promise of an life annuity when you are 65 vs a couple grand today most people take the couple grand today. They know what the couple of grand is worth they have no idea what a life annuity at 65 is worth, so it is for all practical purposes worthless to them.

Off soap box.

Your pre-soap box comments make total sense.

Soap box:

I would kill to work for a company with a pension plan. Give me a promise of certainty over uncertainty anyday. We have a match at my company (which is owned by a big bank). Do you think I should seek out an annuity outside of a qualified plan? Is it worth it?