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Chapter 2: Income Tax Issues

139

C.

Participant only: Plan can assume there is no DB.

The plan is not required to take into

account whether a participant’s Designated Beneficiary is his more-than-10-years-younger

spouse

( ¶ 1.3.03 )

. For purposes of computing the portion of any distribution that will be

treated as “nonrollable” because it is an RMD (and as therefore not subject to mandatory

20 percent withholding applicable to “eligible rollover distributions”), the plan is entitled

to assume that the participant has no Designated Beneficiary (and therefore to distribute to

the participant an RMD” computed using the Uniform Lifetime Table rather than the joint

life expectancy of the participant and spouse). Reg.

§ 1.401(a)(31)-1 ,

A-18(c);

§ 31.3405(c)-1 ,

A-10. The participant can roll over the portion of such distribution that is in

excess of the “true” RMD. Reg.

§ 1.402(c)-2 ,

A-15.

D.

Participant only: Rollovers in the age-70½ year.

Another “trap” is that the participant’s

first Distribution Year is not the year in which the required beginning date (RBD;

¶ 1.4 )

occurs; it is the year

before

the RBD. The first Distribution Year is the year the participant

reaches age 70½ (or, in some cases, retires), even though the first RMD does not have to

be taken until April 1 of the

following

year. Accordingly, any distribution received by the

participant on or after January 1 of the first Distribution Year will be considered part of the

RMD for that year, and thus cannot be rolled over. Reg.

§ 1.402(c)-2 ,

A-7(a), (b). For

similar problems facing Roth IRA converters, see

¶ 5.2.02 (

E)

, ¶ 5.4.02 (

A).

Leonard Example:

Leonard turns 70½ on January 1, Year 1. On that date, he retires from his job

at XYZ Corp. and asks the plan administrator of the XYZ retirement plan to send his benefits to

his IRA in a direct rollover. The administrator replies that it will make a direct rollover of

everything except the RMD for Year 1. Leonard is unhappy because he thought he could postpone

all RMDs until his RBD in Year 2. Unfortunately for Leonard, if he insists on not taking any RMD

in Year 1, then he also cannot do a rollover in Year 1. A direct rollover IS considered a

“distribution” for purposes of the rule that RMDs cannot be rolled over, even though a direct

rollover is NOT considered a distribution for income tax or withholding purposes! Note that if

Leonard dies before April 1 of Year 2, and before removing his benefits from the retirement plan,

his surviving spouse

(¶ 3.2)

or nonspouse Designated Beneficiary

( ¶ 4.2.04 )

could roll over

Leonard’s entire account balance, because death before the RBD simply “erases” the RMD for

both the first and second distribution years.

¶ 1.4.07 (

C).

E.

Beneficiaries only: Rollover and the 5-year rule.

If the 5-year rule

( ¶ 1.5.06 ¶ 1.5.07 )

applies,100 percent of the remaining account balance becomes the RMD” in the year that

contains the fifth anniversary of the participant’s death (or sixth anniversary, in the case of

deaths in 2004–2009), and thus there can be no rollover in that year. However, no amount

distributed prior to that year is considered an RMD, and thus there is no RMD-based

restriction on rolling over distributions made prior to that year. Reg.

§ 54.4974-2 ,

A-3(c);

Notice 2007-7, 2007-5 I.R.B. 395, A-17(b).

F.

Exceptions to the no-rollover-of RMDs rule.

There are three quasi-exceptions to the no-

rollover-of RMD rule: One is when a plan has an earlier required beginning date than the

statute requires; se

e ¶ 1.4.04 .

The second occurs when a surviving spouse who is named as

sole beneficiary of an IRA is deemed to have elected to treat it as her own because of her

failure to take an RMD as beneficiary; this rule in effect allows her to roll over that RMD

in certain cases. See

¶ 3.2.03 (

D)(3),

¶ 3.2.06 , ¶ 1.6.04 .

Finally, it was possible to roll over