Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

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). § 408(d)(3)(A)(ii) 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. § 402(c)(8)(B)(iii) , (iv) , (v) , (vi) . 2.6.03 Rollover in a year in which a distribution is required 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.  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, surviving spouse, or 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 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 the rollover first , the plan would have had to distribute her RMDs to her from the cash fund before it could do a direct rollover of the rest; Elizabeth would then have received a nonrollable RMD in cash, and she would IN ADDITION have to pay tax on the basis portion of the NUA stock when that was distributed later in Year 2. B. Everybody: Missed RMDs from prior years. The last sentence of Reg. § 1.402(c)-2 , A- 7(a), indicates that any RMDs not taken in a prior year are not eligible to be rolled over in a later year.