Rollover in a year in which a distribution is required

A minimum required distribution (MRD) cannot be rolled over. § 402(c)(4)(B), § 403(b)(8)(A)(i), § 408(d)(3)(E). The following persons must navigate the traps described in A–E below:

T A participant who is seeking to roll over a distribution from his own plan or IRA.

T A surviving spouse seeking to do a rollover of benefits inherited from the deceased spouse. See ¶ 3.2 of Life and Death Planning for Retirement Benefits.

T A nonspouse Designated Beneficiary seeking to have benefits transferred from an inherited nonIRA plan to an inherited IRA (see ¶ 4.2.04 of Life and Death Planning for Retirement

Benefits).

T A participant, surviving spouse, or Designated Beneficiary seeking to do a Roth conversion of traditional benefits. See ¶ 5.2.02(E) (in this Appendix B).

A. Everybody: First distribution of the year is the MRD. The first “trap” is that the first

distribution received in any year for which a distribution is required (Distribution Year) is

considered part of the MRD for that year and thus cannot be rolled over. Reg. § 1.402(c)-2, A-7(a), § 1.408-8, A-4.

B. Everybody: Missed MRDs from prior years. The last sentence of Reg. § 1.402(c)-2, A-7(a), indicates that any MRDs not taken in a prior year are not eligible to be rolled over in a later year.

C. Participant only: Plan can assume there is no DB. The plan is not required to take into account whether a participant’s Designated Beneficiary is his more-than-10-years-younger spouse (¶ 1.3.03). For purposes of computing the portion of any distribution that will be treated as “nonrollable” because it is an MRD (and as therefore not subject to mandatory 20 percent withholding applicable to “eligible rollover distributions”), the plan is entitled to assume that the participant has no Designated Beneficiary (and therefore to distribute to the participant an “MRD” computed using the Uniform Lifetime Table rather than the joint life expectancy of the participant and spouse). Reg. § 1.401(a)(31)-1, A-18(c); § 31.3405(c)-1, A- 10. The participant can roll over the portion of such distribution that is in excess of the “true” MRD. Reg. § 1.401(c)-2, A-15.

D. Participant only: Rollovers in the age-70½ year. Another “trap” is that the participant’s first Distribution Year is not the year in which the required beginning date (RBD; ¶ 1.4) occurs; it is the year before the RBD. The first Distribution Year is the year the participant reaches age 70½ (or, in some cases, retires), even though the first MRD does not have to be taken until April 1 of the following year. Accordingly, any distribution received by the participant on or after January 1 of the first Distribution Year will be considered part of the MRD for that year, and thus cannot be rolled over. Reg. § 1.402(c)-2, A-7(a), (b). For similar problems facing Roth IRA converters, see ¶ 5.2.02(E) (in this Appendix B) and ¶ 5.4.02(A) of Life and Death

Planning for Retirement Benefits.

Leonard Example: Leonard turns 70½ on January 1, Year 1. On that date, he retires from his job at XYZ Corp. and asks the plan administrator of the XYZ retirement plan to send his benefits to his IRA in a direct rollover. The administrator replies that it will make a direct rollover of everything except the MRD for Year 1. Leonard is unhappy because he thought he could postpone all MRDs until his RBD in Year 2. Unfortunately for Leonard, if he insists on not taking any MRD in Year 1, then he also cannot do a rollover in Year 1. A direct rollover IS considered a “distribution” for purposes of the rule that MRDs cannot be rolled over, even though a direct rollover is NOT considered a distribution for income tax or withholding purposes! Note that if Leonard dies before April 1 of Year 2, and before removing his benefits from the retirement plan, his surviving spouse or nonspouse Designated Beneficiary could roll over Leonard’s entire account balance, because death before the RBD simply “erases” the MRD for both the first and second distribution years. For more on this rule, see ¶ 3.2 and ¶ 4.2.04 of Life and Death Planning for Retirement Benefits, and ¶ 1.4.07(C).

E. Beneficiaries only: Rollover and the 5-year rule. If the 5-year rule (¶ 1.5.06–¶ 1.5.07) applies,100 percent of the remaining account balance becomes the “MRD” in the year that contains the fifth anniversary of the participant’s death (or sixth anniversary, in the case of deaths in 2004–2009), and thus there can be no rollover in that year. However, no amount distributed prior to that year is considered an MRD, and thus there is no MRD-based restriction on rolling over distributions made prior to that year. Reg. § 54.4974-2, A-3(c); Notice 2007-7, 2007-5 I.R.B. 395, A-17(b).

F. Exceptions to the no-rollover-of-MRDs rule. There are three quasi-exceptions to the no- rollover-of-MRD rule: One is when a plan has an earlier required beginning date than the statute requires; see ¶ 1.4.04. The second occurs when a surviving spouse who is named as sole beneficiary of an IRA is deemed to have elected to treat it as her own because of her failure to take an MRD as beneficiary; this rule in effect allows her to roll over that MRD in certain cases. See ¶ 3.2.03(D)(3) and ¶ 3.2.06 of Life and Death Planning for Retirement

Benefits, and ¶ 1.6.04. Finally, it was possible to roll over certain MRDs under transition rules