Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

135

This ¶ 2.6 explains how a participant can transfer or “roll over” assets from one of his retirement accounts to another (or “roll” a distribution back into the same plan or IRA it came out of), without having the transferred or distributed amount included in his gross income. Unless otherwise indicated, the same rules described here for tax-free rollovers also apply to Roth IRA “conversions,” which are in essence “taxable rollovers” ( ¶ 5.4.03 (A)). This ¶ 2.6 deals primarily with rollovers and transfers by the participant. For rollovers and transfers by a surviving spouse, see also ¶ 3.2 ; by nonspouse beneficiaries, see ¶ 4.2 . This book deals with rollovers from the perspective of planning and compliance for the individual participant or beneficiary, and thus deals only with transfers and rollovers to or from IRAs . Plan administration matters, and rollovers that do not involve IRAs, are not covered; see instead The Pension Answer Book ( Appendix C ). 2.6.01 Definitions: rollovers, trustee-to-trustee transfers, etc. Rollovers and trustee-to-trustee transfers are both ways to move assets from one retirement plan to another. A rollover can also be a way to money assets out of a plan and then back in to the same plan. Beyond that, it is difficult to define these terms because they overlap. A. Background: Rollover vs. trustee-to-trustee transfer. In dealing with “rollovers” and “transfers” from one plan to another, we are dealing with an evolving and confusing terminology. A “rollover” originally meant the distribution of funds out of one retirement plan to the participant or surviving spouse, followed by the recipient’s redepositing all or part of that distribution into the same or a different retirement plan—but now we also have “direct rollovers” (see “C”) where the money passes directly from a nonIRA plan to an IRA, without spending any time in a “taxable account.” At one time, a “rollover” always meant a “tax-free rollover”—but now we also have taxable rollovers (called “Roth conversions”; ¶ 5.4.03 , ¶ 5.4.04 ). A “trustee-to-trustee transfer” once meant the transfer of funds directly from one IRA to another IRA of the same participant (or beneficiary), an approach that avoided many of the rules applicable to “rollovers” (see ¶ 2.6.08 ); but now we also have trustee-to-trustee transfers from a nonIRA plan to an IRA (direct rollover; see “C”), and these are subject to certain “rollover” rules, as well as IRA-to-IRA transfers that are both taxable and subject to (some of) the rollover rules (Roth conversions; see ¶ 5.4.03 ). B. Definition of “rollover” and “rollover contribution.” Generally, a retirement plan distribution is not included in anyone’s gross income if the distribution is “rolled over” to the same or a different “eligible” retirement plan or IRA, if various requirements are met. § 402(c)(1) , § 408(d)(3) . If the rollover meets all the requirements, but the recipient account is a Roth IRA , the rollover (Roth conversion) is a valid rollover but it is taxable ; see ¶ 5.4.03 , ¶ 5.4.04 . For the requirements of a valid rollover, see ¶ 2.6.02 – ¶ 2.6.06 . For ways to avoid these requirements, see ¶ 2.6.07 – ¶ 2.6.08 . There are two ways to accomplish a rollover; see “C” and “D.”