Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

153

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. 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. If the plan proceeds on that assumption (ignoring the participant’s actual beneficiary), the plan will distribute to the participant more than the participant’s “real” RMD. The participant can roll over the portion of such distribution that is in excess of the actual 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). For similar problems facing Roth IRA converters, see ¶ 5.2.02 (E), ¶ 5.4.02 (A). Leonard Example: Leonard turns 70½ on February 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 the Year 1 RMD 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, and thus there can be no rollover in that year. However, no amount distributed prior to that year is considered an RMD, and