Phillip Q. Shrotman


IRA, Not As Simple As It Looks

Advisors should be familiar with planning strategies that are optional for company plans, before you assure your clients that the strategy is available. My personal opinion is; once you are no longer employed by an employer who offered a Qualified Retirement Plan (i.e. 401(k), 401(b), 457 etc.) an IRA Rollover should be considered.

  • Required beginning date – The tax code allows individuals to delay the first year’s Required Minimum Distribution (“RMD”) until April 1 of the year after the client turns age 70 ½. That means if they turned 70 ½ in 2018, the first RMD isn’t actually due until April 1, 2019. All subsequent RMDs must be issued before December 31.

However, plans are not required to give participants the ability to delay that initial RMD. In fact, many plans do not and simply process all RMDs before Dec. 31. They do this to ease administration and to remove the fear that an initial RMD will not be processed before the April 1 deadline.

  • Still working exception – Unbelievably, plans do not have to offer this popular exception to the RMD start date rules. Thankfully, there is some relief. First, the exception is widely used and is considered the norm. Second, the exception is actually the default rule under the tax code. Finally, under IRS guidance, RMDs that are issued while a person is still working for the company sponsoring the plan can be rolled over to an IRA, because they are technically not an RMD in this scenario.


  • Stretch distributions – Plans do not have to offer the stretch distribution option to any beneficiaries under the plan, including the worker. However, most plans do offer the stretch to at least the employee and spouse beneficiaries. Quite often, this treatment is not extended to non-spouse beneficiaries. That means they would be forced to completely empty the account in five years. In such a scenario, the beneficiary should rollover the plan money into a properly titled, inherited IRA, thereby allowing them to stretch distributions over their life expectancy.

  • Designated Roth AccountsRoth accounts are after-tax accounts that can be offered by 401(k), 403(b) and 457(b) plans, but companies do not have to offer these. Just as with the pre-tax component of the plan, Roth contributions are elected at open enrollment and are then deposited into the plan when earned. However, the Roth plan could allow what’s called an in-plan rollover or in-plan conversion. This is a taxable transfer of pre-tax monies to a Roth account within the plan. If offered, the participant does not have to be eligible for a distribution of pre-tax funds to take advantage of the option. While the in-plan rollover is taxable and reportable (on Form 1099-R), it does not trigger the early distribution penalty or withholding requirements.

  • Hardship distributions – Plans are not required to offer hardship distributions, including any of the new disaster relief provisions passed by Congress. However, if the plan does offer hardship distributions, the disaster relief provisions themselves are optional – at least for now. Just recently, the IRS released new proposed hardship regulations that added a new distribution category and further liberalized some of the rules. The new distribution category is for expenses and losses incurred by an employee due to damage suffered to his or her home or place of employment due to a federally declared disaster. Plans can impose the new rule retroactively to Jan. 1, 2018. This would cover disasters that occurred earlier in the year, like Hurricanes Michael and Florence. However, plans are not required to apply the new rules retroactively.

Since the passage of the Pension Protection Act of 2006, Congress and the IRS have slowly loosened some of the onerous and unnecessary restrictions on hardship distributions. One of those restrictions required plans to suspend salary contributions for six months after a hardship distribution. The new proposed regulations eliminate this requirement beginning the first day of the plan year after Dec. 31, 2018 (i.e., Jan. 1, 2019 for calendar plans). However, plans have a choice: they can quit applying the provision for all outstanding hardship distributions or they can apply it only for distributions made after the effective date.

  • Plan loans – Just like hardship distributions, not only are plan loans themselves optional, but some of the additional features allowed under the tax code are as well. For example, plans can restrict participants to one outstanding loan or allow multiple loans to be taken out. However, unlike the new additions to the hardship rules, plans that offer loans are required to apply the new disaster relief provisions that were passed for the victims of the 2017 California wildfires and Hurricanes Harvey, Irma and Maria. These include the increase in the loan limit from $50,000 to $100,000 (or 50% of the vested benefit, whichever is less) and the one-year repayment delay. These new rules only apply to loans that are issued on or before Dec. 31, 2018.

  • In-service distributions – While elective deferrals (i.e., salary contributions) cannot be distributed until age 59 ½, death, disability or termination of service, other types of contributions have different rules. For example, contributions that were rolled over from another plan can be distributed at any time – if the plan allows. On the other hand, the plan could subject all contributions, including rollover money and after-tax contributions, to the salary contribution timeline discussed above. Therefore, it’s vital that workers understand a plan’s distribution rules for rollover contributions before making the election.

  • Rollovers into the Plan – Speaking of rollovers, plans have the option to limit the types of funds that can be rolled into the plan. This includes prohibiting pre-tax IRA money from being rolled over. Why would someone want to roll IRA money into a qualified plan? There are many reasons. They could be looking for the additional creditor protection under ERISA. Older workers may want to avoid RMDs from their IRA by rolling the funds into a qualified plan of their current employer, thereby taking advantage of the “still working” exception, if the company plan allows that. Finally, individuals looking to convert nondeductible IRA contributions to a Roth IRA may want to roll the pre-tax IRA money into a qualified plan to isolate the after-tax IRA funds so they can be withdrawn or converted to Roth IRAs tax free. However, all these options are unavailable if the plan excludes rollovers from IRAs.

  • Direct rollovers out of the plan – Staying with the rollover theme, the tax code does not limit the number of direct rollovers that can occur in a single transaction. A taxpayer could directly rollover a distribution to five, 10, or even 20 different tax-deferred accounts. However, plans can limit the number of direct transfers. Some may only allow one direct rollover per transaction. This becomes vital if the account has both pre-tax and after-tax contributions. The withholding rules only apply to pre-tax amounts that are not directly rolled over. Money that’s withheld is considered taxable and subject to the 10% early distribution penalty.

Advisors should look to see which of these common options the clients’ company plans allow before providing advice on these issues.