Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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§ 408(d)(3)(C)(ii) . Employee A requests a distribution of her account balance in the form of a direct payment from IRA N to Plan M. The trustee for IRA N issues a check payable to the trustee for Plan M for the benefit of Employee A and provides the check to Employee A. Employee A delivers the check, including a check stub that identifies ‘IRA of Employee A’ as the source of the funds, to the plan administrator for Plan M. Employee A certifies that her distribution from IRA N includes no after-tax amounts. Employee A also certifies that she will not have attained age 70½ by the end of the year in which the check is issued.” The participant’s certifying that the check contains no after-tax funds enables the plan administrator to rely on that certification and therefore accept the funds (since QRPs are not allowed to accept rollovers of after-tax money from IRAs; ¶ 2.6.02 (H)). In the Gibbs Example ( ¶ 2.2.08 (G)), if Gibbs participates in a QRP that accepts rollovers, Gibbs could direct the IRA provider to send a check for an amount equal to all of the pretax money in both of his IRAs to the plan administrator of the QRP, along with Gibbs’s certification to the QRP administrator that this money is all pretax. Once that rollover is completed, his IRA is left with only the after-tax money and he can convert it to a Roth IRA tax-free (or withdraw it from the account tax-free if he needs some cash). Roth IRA conversion. Generally, any IRA distribution consists proportionately of pre- and after-tax money, and the same is true for any transfer (conversion) from a traditional IRA to a Roth IRA. ¶ 2.2.08 . If the participant takes a distribution from his IRA, and the distribution contains both pretax and after -tax money, and the participant rolls over (converts) only part of the distribution to a Roth IRA, the rollover would apparently consist of the same proportions of pre- and after-tax money as the distribution itself. See Reg. § 1.408A-4 , A-1(b), (c), A-7(a); § 408(d)(1) , (2) ; compare § 408(d)(3)(H) . Unlike with the special rules applicable to partial rollovers of QRP distributions ( ¶ 2.2.05 (C)), and to IRA-to-nonIRA plan rollovers (see “A” above), there is no special exception to § 72 applicable to partial IRA-to-IRA (or IRA-to-Roth IRA) rollovers that would cause the pretax money to be deemed rolled first. B. Partial IRA to

2.3 Income Tax Withholding

For the interaction of income tax withholding and the recipient’s right to roll over benefits, see ¶ 2.6.02 (first paragraph).

Withholding of federal income taxes: overview

Retirement plan distributions are subject to withholding of federal income taxes. This fact creates problems and planning opportunities. This book does not cover state or local withholding requirements. Chapter 24, Subchapter A, of the Code ( § 3401 – § 3406 ) establishes the withholding of income tax at the source of payment. Though titled “Withholding from Wages,” one section of the Chapter ( § 3405 ) also provides income tax withholding rules for QRPs, 403(b) plans, and IRAs. ¶ 2.3.02 explains the Code’s general scheme for withholding from retirement plan distributions, including the different rules for different types of distributions. Exceptions and