life insurance

[R. Butler]

Participant held life insurance within a retirement plan.  The rep. on the policies advised the participant that the policies should be transferred to the participant and the participant followed that advise.  Fortunately participant is over 59 1/2 and had a distributable event.  However, the participant was not aware that the transfer constituted a taxable distribution.  We are still within 60 days of the transfer.  if the participant has sufficient outside assets can he contribute an amount to an IRA equal to the cash value less the basis and treat it as an indirect rollover?

Thanks for any guidance. 

[Bird]

That should work.  Don't forget to get the participant to sign forms for the original distribution, and report it properly as taxable except for the basis; he'll have to show the rollover on his tax return.

Of course there was a failure to withhold...I'd explain that and let the client instruct me not to do anything about it.

[JJRetirement]

I don't think this would work as a solution to your problem because IRAs cannot hold life Insurance contracts. 

Please see section 408(a) of the Code.  

[R. Butler]

16 minutes ago, JJRetirement said:

I don't think this would work as a solution to your problem because IRAs cannot hold life Insurance contracts. 

Please see section 408(a) of the Code.  

Yes, but that isn't the question.

The question is whether he can come up with the funds apart from the policy and roll that cash over? 

Thank you for your input.

[Belgarath]

RB - I think the language under 1.402(a)-1(a)(2) is a little confusing, but it seems to draw a distinction between nontaxability due to irrevocable conversion to a nontransferable annuity contract, or treating it as a rollover contribution under IRC 402(c), and either method is acceptable. It isn't entirely clear to me exactly what is meant by "treating" it as a rollover under IRC 402(c), but it seems likely that this might include what you propose. I don't know if there is other guidance on this or not.

[CuseFan]

participants can be allowed to purchase their life insurance contracts from the plan (for fair value) - but not sure if you can restructure it that way after the fact. policy comes out - no tax implications because it is a purchase - cash goes into plan/participant account and then distributed out to participant, rollover eligible. that's what you want to accomplish right?

[Belgarath]

Yeah, that' unlikely to work (assuming paperwork was accurate in the first place) - the assignment form where the policy is absolutely assigned to the insured should have specified if it were a sale.

[Bird]

2 hours ago, Belgarath said:

Yeah, that' unlikely to work (assuming paperwork was accurate in the first place) - the assignment form where the policy is absolutely assigned to the insured should have specified if it were a sale.

I'm not sure that checking the wrong box is fatal, and that may be the best solution (to treat it as a purchase).  At the end of the day, the reason for the assignment is not necessarily relevant to anyone...I mean, what would the insurance company do differently if the "sale" box had been checked?  The end result either way is that the policy is now owned by the participant.

[Earl]

On 6/12/2017 at 8:51 AM, R. Butler said:

 if the participant has sufficient outside assets can he contribute an amount to an IRA equal to the cash value less the basis and treat it as an indirect rollover?

I believe the same property distributed in-kind has to be what is rolled over.

That's from a memory of a while back.  I will see if I can find it again.

[Earl]

The Tax Court recently ruled in Albert Lemishow v. Commissioner of Internal Revenue, 110 T.C. No. 11 (1998), that a taxpayer receiving a cash distribution from an IRA or Keogh plan must roll it over to an IRA in cash in order to qualify as a tax-free IRA rollover contribution. Mr. Lemishow (the "Taxpayer") received cash distributions from his IRA and Keogh plan accounts which he used to purchase stock. Within 60 days of receiving the cash distributions, the Taxpayer opened a new IRA in which he deposited the newly purchased stock. He did not report the IRA or Keogh plan distributions on his federal income tax return. The IRS determined that the rollover was invalid and therefore, the full amount of the distribution was includable in the Taxpayer's income. The Tax Court agreed, holding that, in order to make a tax-free rollover to an IRA of a distribution from an IRA or qualified retirement plan, the rollover must consist of the same amount of money or the same property that was distributed.

[My 2 cents]

18 minutes ago, Earl said:

The Tax Court recently ruled in Albert Lemishow v. Commissioner of Internal Revenue, 110 T.C. No. 11 (1998), that a taxpayer receiving a cash distribution from an IRA or Keogh plan must roll it over to an IRA in cash in order to qualify as a tax-free IRA rollover contribution. Mr. Lemishow (the "Taxpayer") received cash distributions from his IRA and Keogh plan accounts which he used to purchase stock. Within 60 days of receiving the cash distributions, the Taxpayer opened a new IRA in which he deposited the newly purchased stock. He did not report the IRA or Keogh plan distributions on his federal income tax return. The IRS determined that the rollover was invalid and therefore, the full amount of the distribution was includable in the Taxpayer's income. The Tax Court agreed, holding that, in order to make a tax-free rollover to an IRA of a distribution from an IRA or qualified retirement plan, the rollover must consist of the same amount of money or the same property that was distributed.

Can a legitimate conclusion be drawn from this, if the distribution was some sort of in-kind distribution and the participant then sold the property and tried to roll over the cash proceeds?  This case dealt with a cash payout that was used to purchase property that was attempted to be rolled into an IRA.  I (who am not an attorney) cannot imagine that selling an in-kind distribution and depositing the cash proceeds into an IRA could be considered to be an invalid rollover.  Cash is king!  Even so, the distribution and the rollover should both be reported and the cash amount, if within 60 days, should be considered a valid rollover (in my opinion, for what that's worth).