Chapter 5: Roth Retirement Plans
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first-time homebuyer distribution, does NOT apply to DRACs; compare
¶ 5.2.04 ,#4.
§ 402A(d)(2)(A) .B.
How the Five-Year Period is computed for a DRAC.
As with Roth IRAs, DRACs have
a five-year waiting period (called the “nonexclusion period” in the statute, the “Five-Year
Period” in this book) before a qualified distribution can occur.
§ 402A(d)(2)(B) .However,
there is a difference in the way the Five-Year Period is calculated. With a Roth IRA, the
Five-Year Period begins with the first year there is a contribution to any Roth IRA; see
¶ 5.2.05 .For a DRAC, in contrast, the Five-Year Period is five consecutive years beginning with the
first year the employee made a contribution to a DRAC in that particular plan (
i.e.,
the year the
elective deferral was included in his income).
§ 402A(d)(2)(B)(i) .If the employee takes
distribution of the entire account during the Five-Year Period then later makes more contributions,
the start of the Five-Year Period is not “redetermined”; it still begins with the first contribution.
Reg.
§ 1.402A-1 ,A-4(c).
The Five-Year Period is computed plan-by-plan even for two plans maintained by the same
employer. Reg.
§ 1.402A-1, A-4(a), (b). For the only exception to this rule (applicable to certain
rollover amounts), see
¶ 5.7.07 (D).
However, certain DRAC contributions do NOT start the Five-Year Period tolling. “A
contribution that is returned as an excess deferral or excess contribution does not begin the 5
taxable-year period of participation. Similarly, a contribution returned as a permissible withdrawal
under section 414(w) does not begin the 5 taxable-year period of participation.” Reg.
§ 1.402A-1, A-4(a).
( § 414(w)came into effect in 2008, allowing for “eligible automatic contribution
arrangements.”) This rule avoids game-playing: The participant cannot start the five-year clock
running with a contribution that is returned to him.
Once the Five-Year Period has elapsed, and the triggering event requirement is met,
subsequent distributions are generally qualified; for exceptions, see “C.”
Qualified status is determined based on the year in which the distribution actually occurs,
not on some prior year to which it may relate. For example, a distribution received after completion
of the Five-Year Period (and after a triggering event) is a qualified distribution, even if it is part of
a series of substantially equal periodic payments that started prior to the completion of the Five-
Year Period. T.D. 9324, “Preamble,” “Determination of 5-Taxable-Year Period for Qualified
Distributions.”
For how to compute the Five-Year Period with respect to a reemployed
veteran
, see Reg.
§ 1.402A-1, A-4(e).
C.
List of never-qualified distributions.
Certain DRAC distributions can not be qualified
distributions, even if the Five-Year Period and triggering event requirements are met. Reg.
§ 1.402A-1, A-2(c), A-11. These never-qualified distributions are listed by cross-reference
to Reg.
§ 1.402(c)-2 ,A-4:
Corrective distributions of excess plan contributions (including income thereon) made by
the plan in order to comply with the
§ 415limits. A-4(a).