Rollover Avoids RMDs

A recent letter ruling illustrates how one taxpayer used a rollover to avoid a retirement plans required minimum distributions (RMDs). 

Facts

A is an employee of two companies, B Corp. and C Corp. He is also a 5% owner of C, but not of B. B maintains retirement plan X and C maintains plan Y. A is an active participant in both plans and attained age 70 in 2004. Both X and Y use the calendar year as the plan year and meet Sec. 401(a) requirements.

A does not intend to separate from the service of, or retire from, B. However, he has reached the normal retirement date of Y, which permits in-service distributions to participants who have reached their normal retirement date.

A withdrew his calendar-year 2004 required distribution from Y before Dec. 31, 2004. After receiving that distribution, he withdrew the balance of his Y account and rolled it over to X  before Dec. 31, 2004. X permits participants to roll over eligible distributions received from other qualified plans into X. A requested a ruling that he will not be required to receive a distribution from the amount rolled over from Y into X, until he reaches his required beginning date under X.

Analysis

Sec. 401(a)(9) provides rules on required distributions. Specifically, it states that a trust will not constitute a qualified trust unless the plan provides that the entire interest of each employee will be distributed to him or her not later than the required beginning date, or, beginning not later than the required beginning date, over the life of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary).

Sec. 401(a)(9)(C)(i) defines required beginning date as the April 1 of the calendar year following the later of the calendar year in which the employee attains age 70 or retires. For an employee who is a 5% owner (as defined in Sec. 416(i)), the required beginning date is the April 1 following the plan year ending in the calendar year in which the employee attains age 70.

Regs. Sec. 1.401(a)(9)-7, Q&A-2, states that if an amount distributed by one plan (distributing plan) is rolled over to another plan (receiving plan), the benefit of the employee under the receiving plan is increased by the amount rolled over for purposes of determining the RMD for the calendar year immediately following the one in which the rollover is distributed. In other words, the amount rolled over is subject to the receiving plans RMD rules in the calendar year immediately following the one in which the amount was distributed from the distributing plan.

A took a calendar-year 2004 RMD from Y by Dec. 31, 2004, which was not rolled over into X. After receiving it, he withdrew the balance in the Y account and rolled it over into X  by Dec. 31, 2004. Thus, A will not be required to receive a distribution from Y funds rolled over into X until he reaches his required beginning date under X, as determined under Sec. 401(a)(9)(C)(i).

IRS Letter Ruling 200453015 (12/31/04)

Reflections: A avoided RMDs, even though he was 70, because he did not retire and was not a 5% owner in the plan receiving the rollover. Thus, under the second plan, RMDs can be delayed until he retires. Also, because Y provided that As accrued benefit is payable to his surviving spouse on his death, A was not required to obtain spousal consent for the Y distribution and the plan was excluded from the joint-and-survivor annuity and pre-retirement survivor annuity requirements of Sec. 401(a)(l l)(A).