401k piggy bank

[TPApril]

As we enter into another economically challenging time, I have a business owner who needs money for a short term issue.

He wants to, and can, take an in service distribution, and then return it to the plan within 60 days.  I'm thinking he is better off putting it into a new IRA but the advisor is saying to put it back into the plan.  What do other piggy bank owners do with such distributions? He understands he will receive a taxable 1099-R.

[Lou S.]

You can only do one per year. I forget if that's calendar year or 12 month period or you need to satisfy both. I haven't had one in a while, thankfully. But if the Plan allows for rollovers-in I don't see why he can't roll it back into the Plan. You then also have a pretty clear paper trail of the 60 day rule.

[Luke Bailey]

On 6/16/2022 at 3:01 PM, Lou S. said:

I forget if that's calendar year or 12 month period or you need to satisfy both.

12 months from the date of the prior rollover; not based on taxable/calendar year. See IRC sec. 408(d)(3)(B).

[Peter Gulia]

Am I right in thinking IRC § 408(d)(3)(B)’s once-in-the-one-year-period rule applies for IRA-to-IRA rollovers, but does not constrain the frequency of rollover contributions into a § 401(a) plan?

And am I right in thinking IRC § 402(c) does not impose such a once-a-year constraint for a rollover contribution into a § 401(a) plan?

[Luke Bailey]

On 6/17/2022 at 4:53 PM, Peter Gulia said:

Am I right in thinking IRC § 408(d)(3)(B)’s once-in-the-one-year-period rule applies for IRA-to-IRA rollovers, but does not constrain the frequency of rollover contributions into a § 401(a) plan?

And am I right in thinking IRC § 402(c) does not impose such a once-a-year constraint for a rollover contribution into a § 401(a) plan?

Peter, I think you're right. Glad you pointed that out. There is no equivalent in Section 402 (or 403(b), for that matter) to the once-per-year rule that applies to IRAs under 408(d)(3)(B), which by its reference to 403(d)(3)(A)(i) (and not to all of403(d)(3)(A)) limits the application of the rule to only those situations where an individual both received an amount from an IRA and rolled it over to an IRA. This interpretation is confirmed by IRS Announcement 2014-32 which includes the statement:

"The one-rollover-per-year limitation also does not apply to a rollover to or from a qualified plan (and such a rollover is disregarded in applying the one-rollover-per-year limitation to other rollovers), nor does it apply to trustee-to-trustee transfers."

In other words, the one rollover per year rule only applies where there is an IRA on both the "out of" and "into" ends of the rollover.

 

[QDROphile]

At the time, idea of “cascading rollovers” had emerged. If you created several IRAs, you could serially roll over an amount from one to another,  thereby almost effectively withdrawing the amount for some time (greater than the 60-day single rollover period) without paying taxes.  It was like a juggler keeping one or more balls (the amount) in the air at all times. It is unlikely that an individual would be able to unilaterally line up multiple qualified plans to perform the same stunt.

[ASFESQ]

What's the basis for putting it back in the plan?  I don't think you can rollover a distribution to the same plan. Otherwise you could take out as much as you are entitled to every 59 days, redeposit it and to it again.  More egregious than "cascading rollovers" looking for additional plans. 

[CuseFan]

8 minutes ago, ASFESQ said:

What's the basis for putting it back in the plan?  I don't think you can rollover a distribution to the same plan.

I agree, I do not think you can roll a "regular" in-service distribution directly back into the same plan. Also, you have to deal with the 20% w/h, which means coming up with the cash or restoring less. If it's that short term a cash flow concern (and assume plan loan not an option for whatever reasons), then there have to be other short-term borrowing options out there. You could jump through all sorts of hoops - roll to IRA (avoid w/h), take IRA distribution (avoid w/h), use funds, restore funds, roll back into IRA, roll from IRA into plan - a lot of trouble to avoid minimal short-term borrowing costs? Unless there's a risk that the funds might not be restored within two months.

[Peter Gulia]

To support the 60-day bridge loan the participant seeks, shouldn’t we assume the steps are:

1.    Claim a distribution from the employer’s plan. Do not instruct a direct rollover.

2.    For 50+ days, use the money.

3.    Before the 60 days for an indirect rollover runs out, complete a rollover contribution into an IRA.

4.    If the individual prefers an employer’s plan over an IRA, do a rollover contribution (preferably, a direct rollover) from the IRA into the employer’s plan.

[Retired, but still reading]

If the participant is regularly doing "back-door" Roth IRA conversions (making an after-tax IRA contribution and then converting it to Roth), rolling the distribution back into the plan would prevent problems with future back-door Roth activity.