By Jeremy T. Rodriguez, JD
Hi, I am an advisor and attended the Instant IRA Success workshop in 2017 and found it really useful in my practice. I have a client situation I am trying to clarify and am sure you can help. The client ( husband )passed away on December 27, 2017 at age 82 and was taking RMDs from his IRA. His spouse was the sole IRA beneficiary and is age 75 in 2018. The client’s IRA was rolled into the spouse’s own IRA in January, 2018 because of her lower age. My question is: which person’s life expectancy is used to calculate her RMD for 2018? Is it the original owner’s or the spouse’s? Thanks for any help you can provide, Mike
Initially, thank you for attending the workshop and the accompanying comments. As for the client situation, I would assume that since the husband died so late in 2017, he had already taken his RMD for the year. Verify that this in fact did occur. Next, by executing the spousal rollover, your client will get to use her own life expectancy to calculate the 2018 RMD and those going forward. That would be true even if she waited until later in the year to execute the rollover.
I have a government-sponsored 457(b) account, funded with pre-tax money. I have retired from that job and under the terms of the plan, can withdraw the money without penalty. I realize taxes will be due on the 457(b) money at some point. Following my understanding of Ed’s advice, my idea was to withdraw the money each year for the next few years while the tax rates are lower and while my income is lower (i.e., before I start to collect Social Security) and put the money into a Roth account that I already own (and have owned for over 5 years). I understand that if I have the 457(b) company send me a check, they will withhold 20% for taxes and I can invest the withdrawal proceeds in my Roth. If I have the company directly rollover the withdrawal into the Roth, when are the taxes due? The year of the withdrawal from the 457(b) or the year of the withdrawal from the Roth? Also, if I take the check and reinvest within 60 days, how does the IRS know I actually reinvested? Does this create a red flag? Thanks so much for helping with this tricky subject!
To make a Roth IRA contribution, you must have earned income. Under the Tax Code, retirement plan distributions do not count as earned income, even though they are taxable. That means that if you do not have any other source of income that would qualify as earned income, you are not eligible to make a Roth IRA contribution from your 457(b) plan distributions.
But take heart; the earned income rules do not apply to rollovers. That means you can roll over your 457(b) funds to a Roth IRA even if you do not have another source of income. There are two ways to roll over a distribution, directly or indirectly. A direct rollover is a trustee-to-trustee transfer of your plan account to your Roth IRA. The payment is not made out to you, but to the Roth IRA custodian. In this scenario, there is no withholding.
An indirect rollover is one that is paid to you and which you contribute to the Roth IRA within 60 days from the date of distribution. The withholding rules do apply in this case. In both circumstances (i.e., direct or indirect) the income tax on the tax deferred amount will be due for the year the rollover from the plan to the Roth IRA took place. Essentially, you are paying the tax on the money as it comes out of the plan so it can go into the Roth IRA as a post-tax contribution.
Finally, distributions from a qualified plan are reported to the IRS on Form 1099-R and IRA custodians report contributions and rollovers on Form 5498. The IRS can determine discrepancies by reviewing these forms along with your annual Form 1040 filing.