Life and Death Planning for Retirement Benefits

152

Life and Death Planning for Retirement Benefits

G. Plan loans. A plan loan that is deemed distributed under § 72(p) (because the loan does not conform with the plan-loan rules, or due to a loan default) is not an eligible rollover distribution. A “plan loan offset” distribution (when the plan pays itself back out of the participant’s account) is an eligible rollover distribution. See ¶ 2.1.07 . H. After-tax money. Both pre- and after-tax money may be rolled over from a QRP to a traditional IRA; see ¶ 2.2.05 . (Reg. § 1.402(c)-2 , A-3(b)(3), which provides to the contrary, has not been amended to reflect this 2001 law change.) However, after-tax money may not be rolled in the other direction (from an IRA to a QRP). The Code generally allows rollovers from any traditional IRA to any other type of plan in years after 2001, but if the rollover is made from an IRA into a QRP, 403(a) or 403(b) plan, or 457 plan, only the pretax money in the traditional IRA may be rolled. § 408(d)(3)(A)(ii) ; § 402(c)(8)(B)(iii) , (iv) , (v) , (vi) . A required minimum distribution (RMD) cannot be rolled over. § 402(c)(4)(B) , § 403(b)(8)(A)(i) , § 408(d)(3)(E) . The following persons must navigate the traps described in A–E below:  A participant who is seeking to roll over a distribution from his own plan or IRA in his age 70½ year or later. Rollovers in an RMD year: RMD cannot be rolled over!

 A surviving spouse seeking to do a rollover of benefits inherited from the deceased spouse. ¶ 3.2 .

 A nonspouse Designated Beneficiary seeking to have benefits transferred from an inherited nonIRA plan to an inherited IRA ( ¶ 4.2.04 ).

 A participant (in his age 70½ year or later), a surviving spouse, or a Designated Beneficiary seeking to do a Roth conversion of traditional benefits. See ¶ 5.2.02 (E).

A. Everybody: First distribution of the year is the RMD. The first “trap” is that the first distribution received in any year for which a distribution is required (Distribution Year) is considered part of the RMD for that year and thus cannot be rolled over. Reg. § 1.402(c)- 2 , A-7(a), § 1.408-8 , A-4. Elizabeth Example: Elizabeth, who retired several years ago, turned 70½ in Year 1, so her RBD is April 1, Year 2. Her 401(k) plan with her former employer contains $1 million of employer stock (with basis of $200,000 and NUA (¶ 2.5) of $800,000), plus $500,000 of cash. It is now February, Year 2, and Elizabeth, after consulting with several financial, tax, and estate planning advisors, has decided: to take an LSD in Year 2; keep the NUA stock in her own name (then later selling some of it and/or giving some to charity); and roll over the $500,000 of cash to her IRA. She wants the stock distribution in Year 2 to satisfy her combined RMD requirement for the 401(k) plan for both Year 1 and Year 2 (which is about $120,000). To make sure this happens, she takes a distribution of all of the NUA stock FIRST, in March, Year 2. Only AFTER that stock has been distributed to her does she request a direct rollover of the cash to her IRA (which of course must be completed by December 31, Year 2, in order to have an “LSD”; ¶ 2.4.04 ). If she had requested