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Summertime Stumpers

Even the experts can't answer every question.

Natalie Choate, 08/13/2010

Do you have your own solutions/suggestions? Leave a comment at the end of the article!

Check out Natalie's downloadable special reports at her website. There are nine reports, including the best-seller, Roth-Ready for 2010! ($49.95). Plus there's a new free report, Ancient History, which explains some old "grandfather" rules still applicable to a few clients. The price of each report includes four downloads, so you can get updated versions free as they appear.

In August, I figure everybody's at the beach, so this is the time to admit I don't have all the answers. Here are three good questions from my readers, and I don't have a clue what the answers are.

Question: My client has pretax and aftertax money in his traditional IRA. He wants to roll the pretax money into his 401(k) plan. Can this be done by direct transfer of the funds from the IRA to the 401(k) plan, or must the client first take a distribution from the IRA, then roll that distribution over to the 401(k) plan? If he takes a distribution, can he take out just the pretax money that he wants to roll over, and leave the aftertax money in the IRA? Or does he have to take a distribution of the entire IRA in order to get all the pretax money out of the IRA so he can roll it over?

Natalie: This is really two questions, and I don't know the answer to either one.

There is no specific mechanism that I can find in the Code or regulations or other IRS pronouncements "blessing" a direct transfer from an IRA into a qualified plan, so I don't know if you can do it. Some plan administrators will not accept such transfers, due to the lack of clear authority. It clearly is "ok" to roll the pretax money into the 401(k) plan separately from the aftertax money; that maneuver is specifically "blessed" by IRS Publication 590 and Internal Revenue Code § 408(d)(3)(H). But you may have to do it using a distribution to the client, followed by a "60-day" rollover rather than by trustee-to-trustee transfer.

As to whether you must distribute the entire account in order to roll all the pretax money to the 401(k) plan, that's another stumper. Since IRA distributions generally carry out proportionate amounts of pre- and aftertax money, you can't normally just distribute the pretax money to yourself; under normal perceptions of how these rules work, it would appear you must distribute the entire account to yourself in order to get all the pretax money out of the IRA, so you can then roll it into the 401(k) plan. But IRS Publication 590 (2009 edition, p. 23), in discussing this technique, refers to "the amount you either leave in your IRAs or do not roll over," which makes it appear you can somehow distribute just the pretax money. So you tell me. I'm going to move on to the next question.

Question: Section 408(d)(6) of the Internal Revenue Code allows a divorce court to divide individual retirement accounts tax-free between the spouses. So, for example, the court could award half of the wife's IRA to the husband, and that portion would then become the husband's IRA just as if he had created it through his own contributions. Can this procedure be used for an inherited IRA as well?

Natalie: Darned if I know. The Code doesn't specifically address that question, and neither does any court case or IRS pronouncement I'm aware of. I circulated the question to my cabal of IRA gurus and we all had a field day speculating about how or whether this would work, but basically nobody knows if it is or isn't allowed.

Question: My client retired from her job at age 72. She started receiving annual minimum required distributions from the company's profit-sharing plan. Now, at age 75, she has gone back to work at the same company, full time. She is not now and has never been a "5-percent owner" of the employer that sponsors this plan. Because she is once again "not retired," can the plan suspend minimum required distributions to her? Or does the fact that she retired once mean that she is forever considered "retired" for purposes of determining her "required beginning date" for minimum distributions?

Natalie: The required beginning date for minimum distributions for an employee who is not a 5-percent owner of the plan-sponsoring employer is April 1 following the year such employee reaches age 70½, or, if later, April 1 following the year in which the employee retires. This rule has been with us since at least 1996, but the IRS has never seen fit to issue a definition of what "retires" means. Thus, for now, there is simply no basis for concluding that a person can un-retire, and to be conservative and safe the plan must continue to pay this employee minimum distributions from the profit-sharing plan, unless the employee wants to go to the trouble and expense of getting an IRS ruling on the question.

Resources: For more on rollovers and the distribution of aftertax money from retirement plans, see Chapter 2 of the author's book Life and Death Planning for Retirement Benefits, which can be purchased through www.ataxplan.com.

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Do you have your own solutions/suggestions? Leave a comment at the end of the article!

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