IRA One-Rollover-Per-Year Rule

[Steve Stang]

Sorry, it's me again.


Okay, Publication 575 (which is for PENSIONS, not IRAs) says "An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except ... A period of 10 years or more."

http://www.irs.gov/publications/p575/ar02.html#en_US_2013_publink1000226896

An IRA is NOT a "qualified retirement plan".



§1.408-4(b): "(b) Rollover contribution—
(1) To individual retirement arrangement. Paragraph (a)(1) of this section {includable in taxable income} shall not apply to any amount paid or distributed from an individual retirement account or individual retirement annuity to the individual for whose benefit the account was established or who is the owner of the annuity if the entire amount received (including the same amount of money and any other property) is paid into an individual retirement account, annuity (other than an endowment contract), or bond created for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.

That was the basis of my first response. I think the IRA distributions ARE eligible for rollover, and if they are included as taxable income, there would be no penalty. The non-IRA one may not be eligible.


Am I misreading it? What do you think?

I personally think that 72(t) is not an option. I think that the rollover is the best way to handle the annuity distributions from the IRA. I think that he can roll the IRA into another IRA. I think that he still will be left with taxable income for the distributions from the non-IRA annuity. I don't read the provision above or the Rev Proc for 72(t) calculations as applying to a non-IRA.

[Steve Stang]

Boy, what am I missing here? It has always been my understanding that all distributions from an IRA to its owner are eligible to be rolled over into another IRA (or back into the same IRA) within 60 days, except for RMDs and the removal of previous, excess contributions.

Roland, you didn't miss anything. I'm just trying to be sure before providing the advice to the client. I think that the best option is to roll the IRA distribution to another IRA. It may seem obvious but I want to be sure that I wasn't missing anything. H&RB obviously didn't comment on thins when they prepared taxes these past two seasons. (For the non-IRA annuity distribution, I don't think I can offer much more than using some of the money for a spousal IRA and the balance as a contribution to his children's existing 529 plan).

And it was the client who keeps reading the IRS pubs and making reference to the 72(t) regs and I still don't think that's a workable option.

[Roland Slugg]

Boy, what am I missing here? It has always been my understanding that all distributions from an IRA to its owner are eligible to be rolled over into another IRA (or back into the same IRA) within 60 days, except for RMDs and the removal of previous, excess contributions.

[JohnH]

The 72)t) is very tricky.
He had better be sure he follows the rules precisely.

Here is a link to a fantastic site discussing 72(t) withdrawals.
It helps head off many of the pitfalls which can destroy the plan and cost huge penalties.

http://www.72t.net

[TaxGuyBill]

The 10 year rule is for employee PENSIONS, in §402(c)(4).

http://www.law.cornell.edu/uscode/text/26/402#c_4

[David1980]

"(iv) part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of such employee and his designated beneficiary,"

The 10-year thing sounds familiar so I assume that's right, but I also get hung up on the life expectancy.

RR 2002-62 gives three methods.

SECTION 2. METHODS
.01
General rule.
Payments are consid-
ered to be substantially equal periodic pay-
ments within the meaning of
§ 72(t)(2)(A)(iv) if they are made in ac-
cordance with one of the three calcula-
tions described in paragraphs (a) – (c) of
this subsection (which is comprised of the
three methods described in Q&A–12 of No-
tice 89–25).

Method a "The annual payment for each year
is determined by dividing the account bal-
ance for that year by the number from the
chosen life expectancy table for that year."

Method b "The
annual payment for each year is deter-
mined by amortizing in level amounts the
account balance over a specified number of
years determined using the chosen life ex-
pectancy table and the chosen interest rate."

Method c "The
annual payment for each year is deter-
mined by dividing the account balance by
an annuity factor that is the present value
of an annuity of $1 per year beginning at
the taxpayer’s age and continuing for the
life of the taxpayer (or the joint lives of the
individual and beneficiary). The annuity fac-
tor is derived using the mortality table in
Appendix B and using the chosen interest
rate."

Where does the 10-year rule come from?

[Steve Stang]

Sorry, it's me again.


Okay, Publication 575 (which is for PENSIONS, not IRAs) says "An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except ... A period of 10 years or more."

http://www.irs.gov/publications/p575/ar02.html#en_US_2013_publink1000226896

An IRA is NOT a "qualified retirement plan".



§1.408-4(b): "(b) Rollover contribution—
(1) To individual retirement arrangement. Paragraph (a)(1) of this section {includable in taxable income} shall not apply to any amount paid or distributed from an individual retirement account or individual retirement annuity to the individual for whose benefit the account was established or who is the owner of the annuity if the entire amount received (including the same amount of money and any other property) is paid into an individual retirement account, annuity (other than an endowment contract), or bond created for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.

That was the basis of my first response. I think the IRA distributions ARE eligible for rollover, and if they are included as taxable income, there would be no penalty. The non-IRA one may not be eligible.


Am I misreading it? What do you think?

Very helpful. Thanks.

[TaxGuyBill]

Sorry, it's me again.


Okay, Publication 575 (which is for PENSIONS, not IRAs) says "An eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except ... A period of 10 years or more."

http://www.irs.gov/publications/p575/ar02.html#en_US_2013_publink1000226896

An IRA is NOT a "qualified retirement plan".



§1.408-4(b): "(b) Rollover contribution—
(1) To individual retirement arrangement. Paragraph (a)(1) of this section {includable in taxable income} shall not apply to any amount paid or distributed from an individual retirement account or individual retirement annuity to the individual for whose benefit the account was established or who is the owner of the annuity if the entire amount received (including the same amount of money and any other property) is paid into an individual retirement account, annuity (other than an endowment contract), or bond created for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution.

That was the basis of my first response. I think the IRA distributions ARE eligible for rollover, and if they are included as taxable income, there would be no penalty. The non-IRA one may not be eligible.


Am I misreading it? What do you think?

[TaxGuyBill]

Because 72(t)(2)(A)(iv) says so. Pull up Revenue Ruling 2002-62 for a full explanation of this.

I'm really sorry, but I'm still missing it. Maybe I need to sleep on this and read things with a 'fresh' mind.

I keep reading that that in order to qualify, the payout needs to be over the "life expectancy" of the taxpayer. That would be much more than the 10 year payout that the taxpayer is receiving, so I read that it would not qualify.

Am I missing something? Would it be possible for you to point out a specific point that says a 10 year payout (LESS than the life expectancy) qualifies for the penalty exception?

Again, maybe I just need to sleep on it.

Thank you for your patience with me. :-)

[Steve Stang]

Wow, I don't know what happened to my thinking. :-(

I first started out citing the same thing as Burke (Publication 575). For some reason, I talked myself out of it an gave the opposite answer, and I can't figure out what changed my mind. I should know better than to respond to retirement questions. :-)

Burke - With a 10 year payout rather than a 'life expectancy' payout, why isn't it subject to the 10% penalty?

So, in short, he can't do any rollover to shelter the distribution. But he can qualify for 72(t), pay income tax but avoid the penalty. (Sorry, I usually find I have to repeat things for them to sink in). I understand that there are caveats about 72(t) providing that he doesn't change the payout significantly, continues it for at least 5 years (or 59 1/2) and doesn't miss any distributions.

I guess by this logic he may also be eligible to file amended returns for the first two years of distributions in order to reclaim the extra tax penalty.

[Burke]

Burke - With a 10 year payout rather than a 'life expectancy' payout, why isn't it subject to the 10% penalty?

Because 72(t)(2)(A)(iv) says so. Pull up Revenue Ruling 2002-62 for a full explanation of this.

[TaxGuyBill]

Wow, I don't know what happened to my thinking. :-(

I first started out citing the same thing as Burke (Publication 575). For some reason, I talked myself out of it an gave the opposite answer, and I can't figure out what changed my mind. I should know better than to respond to retirement questions. :-)

Burke - With a 10 year payout rather than a 'life expectancy' payout, why isn't it subject to the 10% penalty?

[Burke]

The question is answered in your OP, to wit:

As stated in Pub 575, ..."an eligible rollover is any distribution.......except one ......which is over ......a period of 10 years or more."

This was set up at his age 50 and qualifies for 72(t) treatment. It should not be subject to a penalty as long as it remains in this type of payment plan, and is not prematurely distributed before his age 59 1/2. But it cannot be rolled over. Form 8606 should have been completed with each return unless the 1099R code was 2. You might want to check out Revenue Ruling 2002-62 about a one-time change to determine if this would be beneficial to your client.

[Steve Stang]

Tax Treatment of Annuity Distributions

Thanks for your reply. What I'm asking about are any ways to characterize the distributions in a way that doesn't subject them to tax.

So, is there any way that the 10-year period certain IRA annuity distributions can be classified as 72(t)? If so, then the client would not be subject to the early withdrawal penalty. I briefly spoke with a CPA in a study group yesterday who thought that may depend on the rule about claiming 72(t) right from the beginning (which was 2 years ago).

On the other hand, can the distributions from the IRA annuity (which come out once per year in a lump sum) be rolled within the 60 days of receipt into another IRA under the once-per-year-rule? If so, then the 1099-R matches up with a 5498 from the new (non-annuity) IRA custodian and the whole amount is not subject to any income tax or penalty. The same CPA and several other CFP(r) pros at the same group meeting seemed to think that would be possible provided that the annuity distributions were indeed only coming in one lump sum per year.

[TaxGuyBill]

I'm not entirely sure what you are asking, but here are my thoughts:


I agree, the distributions are not over the life expectancy, so a withdrawal would be subject to the 10% penalty.

I can't find anything that says the distributions can not be rolled over. So from what I read, it would seem that the client CAN roll over the distributions (only do ONE rollover per year!). Receiving a 1099-R doesn't affect the ability to do a rollover. A non-trustee to trustee rollover SHOULD have a 1099-R, and you just indicate on the tax return that it is a rollover.

I'm not sure about the non-IRA account (depending on what type it is). If it's a retirement account and otherwise would be eligible for rollovers, it should also qualify.