Qualified Plan& IRA Rollovers and Portability
Employees have greater freedom to make a tax-free rollover of distributions
from one type of retirement plan to another. This is important for a
person who changes jobs and wants to move retirement assets from one
employer's plan to another. Some plans have been limited to rollovers
to or from the same type of plan. Beginning in 2002, qualified employer
plans, 403(b) annuities, governmental 457 plans and IRAs may accept
rollovers from another plan, even if they are different types. For example,
workers switching from a government agency to a public school might
roll over their 457 plan assets to a 403(b) annuity. Although plans
may accept rollovers, they are not required to do so.
A surviving spouse may roll over the decedent's distributions from an employer
plan into the survivor's employer plan. Before 2002, a surviving spouse could
roll over such distributions only into an IRA.
IRA assets may be rolled over to employer plans even if they did not come from
another employer plan. Employees who roll over employer plan distributions into
an IRA no longer have to keep that IRA separate—a "conduit IRA"—in
order
to do a future rollover to another employer's plan. However, taxpayers born before
Jan. 2, 1936, who want to keep special capital gains and ten-year averaging benefits
will need a conduit IRA to move assets from one employer plan to another.
Rollovers from IRAs to employer plans may not include any after-tax
contributions. Distributions are considered to consist first of the
taxable IRA portion, thus maximizing the amount eligible for rollover.
Rollovers from employer plans may include after-tax contributions to
those plans if the rollover is a direct trustee-to-trustee transfer. A
receiving employer plan— but not an IRA trustee—must separately track
such contributions and related earnings.
Differences Between Treatment of Qualified plans and IRAs
While most IRA custodians provide treatment of IRA distributions
consistent with what Treasury regulations allow, not so with qualified
plans. These new opportunities for stretching distributions to
beneficiaries will not be available if the applicable retirement plan
or IRA does not offer the beneficiaries the option of receiving periodic
payments over their life expectancy. Many plans automatically cash out
death beneficiaries immediately after the participant's death or require
them to take all of their payments within five years after the
participant's death. Therefore, performing a rollover to an IRA can be
very important in preserving flexibility in distributions.
Creditor Issues
Qualified plans are ERISA assets and are not subject to the claims
of creditors or bankruptcy. Not so with IRAs as they are governed by State
law. Therefore, if protection from creditors and bankruptcy is a
significant concern, check state laws regarding IRA protection before
performing a rollover.
IRA Distribution Client Newsletter |
