Lump sum pension distribution to rollover IRA
L1: Lump sum pension distribution to rollover IRAI will be receiving a lump sum distribution from my pension fund 1 Aug 2009 and rolling it over into a IRA account which I’ve already established. At that time I would like to commence taking distributions using the 72t program however, at the current 120% of the midterm rate the distribution is small. Secondly from what I’ve read I must use the value of the IRA from the previous december 31st but with the rollover account presently at 0.00 that doesn’t work quite well.
Can you offer some guidance, thank you
jg2009-05-05 16:11, By: johnnyg, IP: [18.104.22.168]
L2: Lump sum pension distribution to rollover IRABefore you rollover your lump-sum pension to an IRA, immediately (now) ask your Human Resources/Payroll/Personnel/Pension Administrator if there is any “NUA Employer Stock) in your account. If so, ask for the “NUA Cost basis”.
This is a special provision of the federal tax code which could save you thousands of $ of federal income taxes, and permit you access to all of this money when you retire without having to set up a SEPP 72-T. That way youn will not be limited to a calculated amount, and no 10% penalty for withdrawals before 59 1/2.2009-05-05 17:04, By: dlzallestaxes, IP: [22.214.171.124]
L3: Lump sum pension distribution to rollover IRAThank you for the good information however I’ve called my Union Pension Plan and we don’t have NUA Employer Stock.
If my rollover IRA funds the 1st of August, can I use that date for determining my SEPP 72-T distribution at that time or do I need to wait until the end of the year, thank you.
jg2009-05-05 18:31, By: johnnyg, IP: [126.96.36.199]
L4: Lump sum pension distribution to rollover IRAJG,
You can use the value of your (new) IRA when the transfer is complete for your calcs, whatever that date may be.You just need to be able to print out a record of that “starting Balance” that you use to document your plan for the IRS- incase theyever ask.. Remember not to commingle rollover funds from a 401k or pension plan rollover with an other (regular) IRA. I assume youmean that the IRA youestablished for this rollover has $0 in it at this point- If not-please us know what is in it, in case we need to comment. Ken 2009-05-05 21:30, By: Ken, IP: [188.8.131.52]
L5: Lump sum pension distribution to rollover IRAHowever you combine your IRA balance with a pension rollover, you must use a starting balance date AFTER the rollover is received and after any IRA transfers are done. Therefore, in your case, an older IRA balance cannot be used. Try to be sure that the pension transfer is complete before setting up the plan, since some plans might issue trailing dividends. Better to start the plan the month after the transfers are all complete, and then print the account statement to document your starting balance. Obviously, be reasonably sure that your balance will yield enough of an annual distribution to get you through the entire period of the SEPP. Note that a for a plan you start this year, you have the option of taking out a pro rated amount by the month (August start would be .4167 of the annual) OR the full annual amount.
2009-05-05 23:43, By: Alan S., IP: [184.108.40.206]
L6: Lump sum pension distribution to rollover IRAUnderstood and thank you, I was unaware of the ability to pro-rate the distribution in 2009. To be clear the rollover IRA will receive only three transfers as follows;
Pension in a lump sum amount, no trailing dividends.
401k funds (Fideltiy acct) earned while working for my union
Money Purchase benefit funds (defined contributions) deposited (Vanguard Funds)while working for my union
Additionally this IRA is not an older IRA but rather a rollover IRA that I’ve established with Vanguard in order to receive the above assets.
Do you see any problems with this?
jg2009-05-06 16:11, By: johnnyg, IP: [220.127.116.11]
L5: Lump sum pension distribution to rollover IRAKen: I’m not sure why you say not to commingle pension and 401(k) funds with another traditional (regular) IRA. Unless JG plans to transfer funds from his SEPP Plan IRA into another qualified, company sponsored plan AFTER COMPLETING the SEPP Plan (5-years and age 59.5) requirements, then there is no reason to avoid commingling of funds. The IRA he has established is a “dry account” which is set up in advancefor the purpose oftransferring funds from his qualified accounts.
JG: I assume you have done your homework to determine how much you need in your SEPP Plan IRA to provide theincome stream required for your financial needs during the SEPP period. If you have multiple, pre-tax accounts like traditional IRA’s and maybe some left behind 401(k) plans at other employers, then you might consider transferring all into one IRA account. Using the “Reverse Calculator” on this site you can determine how much you need to fund a SEPP Plan to provide the necessary income stream. Then set up another traditional IRA, transfer the excess into this second account and use it for emergency, penalty distributions so you don’t wind up “busting” the SEPP Plan if you need extra funds. Of course, do all of the transfers a month or two BEFORE you start taking SEPP distributions, like Alan suggested.
Jim2009-05-06 14:15, By: Jim, IP: [18.104.22.168]
L6: Lump sum pension distribution to rollover IRAJim,
Perhaps I misspoke on comingling these fnds with regular IRA funds. I thought from my own experence and from reading this site and others for the past 3 years that the “rollover IRA” title that I have on two different IRAs that were created from 401k funds, and from ESOP stock payout were better off not being added to any “normal” IRA that I might have when I did those rollovers. I knew that they (401k and ESOP $) could be put together if desired.Perhaps my recollectionhad something to do with it givng one the the ability to movethose rollover IRA monies backto a new employer’s 401k in the future if the personwent back to work. Sorry if that does not apply, and thanks for pointing that out.
KEN2009-05-06 14:32, By: Ken, IP: [22.214.171.124]
L7: Lump sum pension distribution to rollover IRAKen:
The term “Rollover IRA” is the terminology used to identify a Traditional IRA funded with assets transferred from a qualified, company sponsored retirement plan, like a 401(k), ESOP, Defined Benefit Plan, etc. As long as your “Rollover IRA” remains pure, without any “contributory funds,” then you may transfer the account to another qualified, company sponsored plan … assuming the new company’s plan will accept the transfer in. This is also called a “conduit IRA” account.
In your case, assuming that you had satisfied your SEPP Plan requirements, then you would be free to combine any or all pre-tax IRA accounts into one. If this caused “contributory IRA” funds to be commingled with “Rollover IRA” funds, then you wouldlose the “Rollover” designation, which the custodian may or may not change because different custodians do different things for different reasons with no apparent ryme or reason. Of course you would have to keep Roth IRA accounts out of this mix.
Jim2009-05-06 14:55, By: Jim, IP: [126.96.36.199]
L8: Lump sum pension distribution to rollover IRAPerhaps what Ken was thinking about was the creditor protection issue. In the 2005 Federal Bankruptcy Act, unlimited protection was granted for employer plan rollover IRAs, whereas contributary IRA accounts are limited to 1 million in total adjusted for inflation. It was assumed that commingling the two types could result in the 1 mllion limit being imposed, with loss of unlimited protection. This assumption has not yet been fully tested in court, ie. it is not known whether the IRA owner would be allowed to establish the amount of rollovers and still get unlimited protection for that amount…..or not. The safe recommendation was to avoid commingling if this was perceived to be an issue. In many states, state statutes provide 100% protection of IRA balances and a BK filing is not even required, so in those states IF the law remains the same, commingling would notpresent a problem.
Jim has described the other main issue, which is the potential rollover of IRA assets to a future employer plan, self employed DC plan etc. when a conduit IRA has a better chance of acceptance. I really don’t know why, since employer planafter tax amounts have been rollover eligible since 2002,therefore limiting roll backs to conduit IRAs provides no guarantee that the acquiring plan will NOT get after tax amounts, which is not allowed and could disqualify the plan or result in painful corrective measures.2009-05-06 23:57, By: Alan S., IP: [188.8.131.52]
L9: Lump sum pension distribution to rollover IRAAlan:
Excellent point. I had not considered the Bankruptcy Protection aspect for not commingling Rollover IRA’s with Contributory IRA’s and that’s a biggie. Below are two”understandings” of the tax code thatI have along these lines.Pleasecomment.
1. Only “Pure Rollover IRA accounts” are considered “conduit” accounts eligible for transfer to a new qualified, employer sponsoredplan.
2. ANY contribution of new money to a Rollover IRA either by transfer-in from another contributory IRA, or simply adding current, pre-tax funds to the account will automatically convert the Rollover IRA to a Contributory IRA, thus negating the Conduit IRA status.
Jim2009-05-07 14:34, By: Jim, IP: [184.108.40.206]
L10: Lump sum pension distribution to rollover IRAAlan may also comment, but both of your points are correct.
2009-05-07 17:11, By: Gfw, IP: [220.127.116.11]
L10: Lump sum pension distribution to rollover IRAJim,
1) A conduit would indeed be a rollover IRA holding employer plan rollovers only. However, since 2002 (EGTRRA tax bill), ANY IRA is eligible for rollover to an accepting employer plan. But many employer plans will not accept rollovers from non conduit IRA accounts because they feel that this provides them some protection from getting after tax dollars. Actually, while it may be less likely that they get after tax dollars this way, the employer plan cannot be totally sure because since 2002, after tax contributions from employer plans can be rolled into these conduit IRA accounts which means that they are not necessarily totally pre tax.
2) I agree that this would eliminate the conduit (aka rollover IRA)status. However, I also have developed the impression that IRA custodians do not pay alot of attention to the “rollover” included in the IRA registration. For example, one account I have with Schwab that was originally a conduit IRA is still registered as such even though I rolled a contributary IRA into it. I suspect there is little conformity on these issues between IRA custodians.
2009-05-08 02:45, By: Alan S., IP: [18.104.22.168]
L11: Lump sum pension distribution to rollover IRAAlan:
Thanks for your additional comments which I agree with completely. Let me add some additional comments.
1. While The Code may allow the elements you have described, I think the plan administrator is the real road block.If a planDOES NOT already allow after-tax contributions for employees then the plan sponsor does not have to pay the custodian for tracking after-tax contributions. If a new employee wants to transfer-in his conduit IRA which contains both pre and post-tax contributions, then the plan sponsor would have to incur additional costs to set up an additional tracking system for one employee. That ain’t gona happen.
2. IRA custodians absolutely do not adequately track the nature of money in an account. I have experienced many times the same situation you have with your accountat Charlie’s Place. They leave it up to the account owner to deal with tax issues. Unless you draw something to their attention that needs to be or can be changed, the custodian will just let things roll along. This situation is like you owning your home with your wife and the deed is titled JTWROS. One of you dies and by law the house automatically becomes the sole property of the surviving spouse. No legal action is required and you don’t need a new deed. Of course when the second spouse dies, then probate comes into play.
Thanks again for you response.
Jim2009-05-08 14:18, By: Jim, IP: [22.214.171.124]
L12: Lump sum pension distribution to rollover IRAAnd in the case of the house or investments owned JTWROS, you then have the problem of determining the new cost basis ( 1/2 of original cost plus 1/2 of Fair Market Value date of death).
With rollovers, you have the problem of continuing to track any after tax cost basis. With SEPP 72-T you have to maintain the original documentation of the account values on which you determined the annual distribution amount.2009-05-08 14:43, By: dlzallestaxes, IP: [126.96.36.199]
L12: Lump sum pension distribution to rollover IRAJim,
Re #1) I agree that the tracking requirement of after tax contributions is mandatory if an employer plan chooses to accept after tax contributions from another employer plan which they must receive by direct transfer.
However, when it comes to IRAs, conduit or otherwise, they CANNOT accept after tax contributions even if they want to, or the plan risks disqualification. Since the plans do not really trust the accuracy of the 8606 form controlled by the IRA owner, many will not accept ANY IRA rollovers out of fear of receiving after tax basis. This restriction is typically footnoted on the portability charts that have been around since 2002, when portability was dramatically increased. Here is one of those charts:
http://www.mhco.com/Library/Articles/2008/ARoll_Chart_011008.html2009-05-08 19:38, By: Alan S., IP: [188.8.131.52]
L13: Lump sum pension distribution to rollover IRAJust to clarify, there is no such thing as a “NON-DEDUCTIBLE IRA ACCOUNT”. The taxpayer/preparer can designate part or all of his IRA contributions to his TRADITIONAL IRA account as being “non-deductible”, and must report it as such on form 8606 to the IRS with his tax return, or separately if he realizes the requirement after filing his tax return. ( The 8606 is one of the few IRS forms with signatures.)
Taxpayers often indicate that they are taking a distribution from their “Non-Deductible IRA account”, and that it is not taxable. They are wrong. First of all, all distributions from IRA accounts ( other than ROTH IRAs) are taxable to some extent. If there is only 1 account, which was funded only with non-deductible contributions, then the taxable amount will be the ratio of the non-deductible contributions cumulatively divided by the balance as of 12/31 of the year preceding the distribution.
If there are several Traditional IRA accounts, then the numerator is the total of ALL traditional IRA accouints, not just the one the taxpayer thimks is his “n on-deductible account”.2009-05-08 20:06, By: dlzallestaxes, IP: [184.108.40.206]
L14: Lump sum pension distribution to rollover IRAHey guys,
Looks like I started a long thread, and there is very good info for usall to digest in this exchange. I may well have also seen (in my past readings) Alan’s comment about bankruptcy protection being better for rollover IRAs vs. regular IRAs as well. I knew there were some advantages to keeping it separate if that was possible. KEN2009-05-08 21:21, By: Ken, IP: [220.127.116.11]