April 2022
New IRS Guidance on General Rollover Rules and Transfers
The IRS had not updated their regulation on direct rollovers and rollovers for some time. Code Section 402(c) had been revised numerous times because of law changes.
An RMD is ineligible to be rolled over and ineligible to be directly rolled over. Code section 402(c)(4)(B) provides that any distribution required by section 401 (a)(9)(an RMD) is excluded from the definition of an eligible rollover distribution.
An RMD with respect to an IRA is eligible to be transferred.
Thus, it is very important to determine what amount in any given year is an RMD because it is ineligible to be directly rolled over or rolled over. The IRS has proposed that there be new rules which complicate this RMD determination.
Code section 402(c)(11) as enacted in 2006 provides that a non-spouse beneficiary of a retirement plan who is a person does have the right to have portion of the distribution made in the form of a direct trustee to trustee transfer to an inherited IRA. Note the IRS does not use the term direct rollover. The IRS states that an RMD is ineligible to moved via a direct trustee to trustee transfer.
In determining whether a distribution to a beneficiary is an eligible rollover distribution, the portion of the distribution which is an RMD must be determined. In general the rules set forth in Notice 2077-07 will continue to apply, but they are expanded to cover spouses and non-spouse beneficiaries.,
The direct trustee to trustee transfer is treated as an eligible rollover distribution.
If the IRA owner dies before their RBD, there is no RMD for that year. So the entire amount may be directly rolled over. For subsequent years the rule to be used depends upon which rule applies to the beneficiary - the 5-year rule, the 10-year rule or the life distribution rule.
If the 5-year rule applies, then there is no RMD until that 5th year. That is there is no RMD for years 1-4. Thus a total rollover is permitted in years 1-4. No rollover is permitted in year 5 because the entire amount is an RMD.
If the 10-year rule applies, then there is no RMD until that 10th year. That is there is no RMD for years 1-9. Thus a total rollover is permitted in years 1-9. No rollover is permitted in year 10.
General Rollover Rules and RMD Rules Impacting Rollover Rules and Transfers.
A rollover has two transactions. First a distribution and then a rollover contribution into an eligible retirement plan within 60 days of the distribution. This rollover transaction is non-taxable as long as the recipient plan is not a Roth IRA. If the rollover is into a Roth IRA the distribution must be included in the person’s income.
There are 3 types of rollover distributions: (1) a standard 60 day rollover; (2) a direct rollover or (3) a repayment that the law permits may be made well after the 60 day limit. In many instances the rollover contribution may be made by the tax filing deadline.
The IRS has proposed that the list of distributions which are ineligible to be rolled over be increased to include the following:
1. a deemed distribution of a collectible; and
2. similar items designated by the commissioner in revenue rulings, notices and other guidance.
The “similar items” is very broad and the IRS can define a transaction as being ineligible for rollover treatment. It appears the IRS wants to create rules so that a person who has a prohibited transaction would be ineligible to rollover that distribution.
Note that the IRS fails to discuss the new rollover rules that if the IRS wrongfully levies someone’s IRA and has to repay the person, that person may rollover the repayment amount (levied amount plus statutory interest).
The IRS list of those distributions which would be ineligible to be rolled over is set forth below:
1. Any distribution which is one of a series of distributions for the !person’s life expectancy, the person’s joint life expectancy, or where the distribution period is 10 years or more.
2. an RMD
3. A hardship distribution
4. Return of an elective deferral because of section 415
5. corrective distributions of excess deferrals
6. corrective distributions of excess contributions (matching)
7. Loans treated as distributions
8. Dividends paid on employer securities
9. Current cost of life insurance (PS 58 costs from pension plan investment)
10. Prohibited allocations pursuant to section 409(p)
11. Distributions allowed to be withdrawn and returned under certain automatic contribution rules;
12. Certain distributions of premiums for accident or health insurance
13. a deemed distribution of a collectible; and
14. similar items designated by the commissioner in revenue rulings, notices and other guidance.
IRS Clarifications.
If a participant has established a distribution schedule which makes them ineligible to rollover any distribution, the beneficiary of that participant is also ineligible to rollover the remaining balance. This is true if the remaining distribution period would no less than the time period making one ineligible.
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