Tip of the Week: Distributions Ineligible for Rollover

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

Any distribution from a qualified 401(a), 457(b) governmental plan and a 403(b) plan is eligible for rollover except:

• Life expectancy payouts or life income annuity payments.
• Fixed installment payments which are ten years or greater in duration.
• A QDRO distribution to a non-spouse alternate payee.
• Hardship distributions or Unforeseeable Emergencies under a governmental 457(b) plan.
• Required minimum distribution.
• Amounts paid directly to a nonspouse beneficiary.
• Corrective distributions plus income.
• Deemed distributions of a defaulted loan.
• Deemed distributions of the cost of life insurance.

If any portion of the rollover contains the RMD, then none of the value can be rolled over. It is of particular importance to watch this for the individual who is rolling money from one account to another via installment payouts where the installments begin before age 70½, but where the individual will become 70½ before the payouts have been completed.

See the following example:

Problem

A participant, age 68, instructs Provider A to rollover his annuity values over a five-year  period to avoid surrender charges. The first two installments are forwarded to the new vendor on behalf of the participant. However, the third installment is due in the year he becomes age 70½.

None of that installment containing the RMD can be rolled over (IRS Notice 93-3). What are the participant’s options?

Solutions

Instruct the receiving vendor to make the RMD from the values that have already been transferred in the first two installments. Remember that the RMD can be calculated on each of the accounts, but the full amount of the required distribution can be taken from one account (subject to the receiving plan’s rules). The accountholder will need to determine whether the receiving provider will allow the RMD without withdrawal or distribution penalties and also whether the transferring provider and the employer’s plan will accept the participant’s certification that the installment no longer contains an RMD.

Alternatively, the participant could receive the distribution, remove the amount necessary to satisfy the RMD and indirectly roll over the balance within 60 days. Remember, since the distribution does contain an RMD, there would be no mandatory federal income tax applicable to the RMD portion.

All other distributions from a qualified plan, a governmental 457(b) plan or a 403(b) plan including death benefit distributions to non-spouse beneficiaries made after January 1, 2010 are eligible rollover distributions which are subject to the mandatory 20% federal tax withholding unless they are directly rolled over to an eligible retirement plan.