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