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| > Investing > Retiring with Natalie Choate |
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| A Trio of New IRA Developments |
| by
Natalie Choate
| 10-09-09 |
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Natalie Choate will be speaking at a location near you if you live in Atlanta (Oct. 23 and Nov. 3); San Diego (Oct. 24); Honolulu (Oct. 26); Baltimore (Oct. 30); New Orleans (Nov. 4); Chicago (Nov. 9 and May 4, 2010); Madison or Milwaukee, Wis. (Nov. 10); Hartford, Conn. (Nov. 17); Dallas (Nov. 19); Houston (Nov. 20); San Antonio (March 16, 2010); Boston (Nov. 23; April 26, 2010); Memphis (Jan. 22, 2010); Orlando (Jan. 28, 2010); Traverse City, Mich. (May 7, 2010); or Minneapolis (June 22, 2010). See all of Natalie's upcoming speaking events at www.ataxplan.com.
This month I'm skipping the usual question and answer format to spread the word about three important new developments: The rollover deadline for certain 2009 distributions has been extended until Nov. 30, 2009; a tax-saving idea based on the direct conversion of "NUA stock" to a Roth IRA has been attacked by the IRS; and the Department of Labor has concluded that taking trustees' fees for managing an IRA for a family trust is not a "prohibited transaction."
Rollover Deadline Extended for "Nonrequired 2009 RMDs"
As we all know (now), the minimum distribution rules were "suspended" for 2009. Specifically, there is no required minimum distribution for 2009 for any defined contribution plan or IRA. The suspension applies to both the plan owner (participant) and beneficiary.
However, some clients had a problem with this. For one thing, many individuals kept on taking their RMDs into early 2009 because they didn't hear about the new law. For another, many retirement plans kept right on paying "RMDs" into the year 2009, despite the new law, because the plan document required these distributions even if the law did not.
The IRS has now addressed these "nonrequired 2009 RMDs." A participant or surviving spouse (as beneficiary) who received a distribution in 2009 that would have been a required distribution under the normal rules but was not actually required to do so because of the one-year suspension can roll over that distribution to another plan or IRA, subject to just a few limits. Furthermore, the deadline for rolling over these "nonrequired 2009 RMDs" is the later of 60 days after the distribution or Nov. 30, 2009.
Now for the limits! This rollover extension will not help everyone who received a nonrequired 2009 RMD. Specifically,
* A nonspouse beneficiary cannot roll over any distribution received in 2009 or any other year. The IRS cannot waive this rule, even if the distribution was made against the instructions of the beneficiary or by mistake.
* A participant (or surviving spouse) cannot roll over into an IRA more than one distribution received from a particular IRA within 12 months. The IRS cannot waive this rule. So, a participant who took (say) three "nonrequired 2009 RMDs" in (say) January, February, and March of 2009 can roll only one of those distributions into a traditional IRA.
* The deadline extension applies only to these particular payments, i.e., "nonrequired 2009 RMDs." A participant or surviving spouse who took out more than what would have been his 2009 RMD and now wishes he/she hadn't done so, does not have an extended due date to roll those excess distributions back into a plan. (There may be some flexibility on this if the payments were part of a series of equal payments that included the "2009 RMDs.")
* Last but not least, the IRS has confirmed what was actually clear all along, namely, that the suspension of RMDs for 2009 does NOT allow an individual who is under age 59½ and who is taking a "series of substantially equal periodic payments" (to qualify for the § 72(t)(4) exemption from the 10 percent penalty on pre-age 59½ distributions), to quit taking his payments for the year 2009. The new law deals ONLY with required minimum distributions payable to participants over age 70½ or to beneficiaries. It has no effect whatsoever on distributions to someone under age 59½ (even if he or she is using the "RMD method" to calculate his/her "series" payments).
IRS Torpedoes NUA-to-Roth-Conversion Idea
Since 2008, participants have been permitted to roll money directly from a qualified plan to a Roth IRA, without the intervening step of rolling the money first into a traditional IRA (then converting the traditional IRA to a Roth).
This plan/Roth conversion option gave rise to the following planning idea: A retiring employee requests, from his employer's qualified plan, a lump sum distribution that includes appreciated employer stock. He directs that the LSD be rolled directly into a Roth IRA, as permitted by § 408A(e) (if he is eligible; that means having less than $100,000 of modified adjusted gross income if the conversion occurs before 2010. The effect of this "Roth conversion" is, according to the Code, that he is taxed as if he took the distribution outright, meaning (apparently) that he will be liable for current tax on only the plan's "basis" in the stock. The "net unrealized appreciation" in the stock is transferred into the Roth IRA without current tax?and then it is NEVER taxed, assuming that later distributions from the Roth IRA are taken as tax-free qualified distributions!
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Natalie Choate practices law in Boston, specializing in estate planning for retirement benefits. Her book, Life and Death Planning for Retirement Benefits, is fast becoming the leading resource for professionals in this field.
The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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