IRA and Qualified Plan Withdrawals

Question 0

What is the 60 day Rollover Rule?

Answer 0

Money can be withdrawn from an IRA, without withholding, and then rolled into the same (or a different) IRA or qualified plan within 60 days thereby avoiding taxes and penalties.

Under new rules in effect starting in 2015, plan owners can only do one 60 day rollover per year for all of their IRAs.

Question 1

What is an “Inservice Distribution”?

Answer 1

Most employer plans do not allow employees to withdraw money from their retirement plans while they are still employed, however some plans do. Such withdrawals are called “Inservice Distribution.”They may be rolled to an IRA within 60 days to avoid taxes and penalties. Or, they may be used to perform a Roth Conversion.

Question 2

How do withholding rules vary for distributions taken from an employer plan versus an IRA?

Answer 2

For an employer plan, distributions are subjected to 20% withholding, even if the intent is to roll it over to an IRA or another employer plan (which is why a direct trustee to trustee rollover is recommend in such cases).

Distributions from IRAs are are not subject to automatic withholding, even if paid directly to the plan owner. The 60 day rollover can be used to avoid taxation (and penalties?).

Question 3

T or F - The IRS allows inservice distributions from employer retirement plans.

Answer 3

True. IRS rules allow for distributions while still working. Normal rules apply regarding withholding and possibly penalties. Withdrawn funds + the withholding amounts can be rolled over to an IRA in 60 days to avoid tax. Or funds can be used fOr a Roth conversion (as with all Roth conversions, taxes the withheld amount and all other taxes should be paid from a separate taxable account)

Question 4

T or F - All employer plans offer Inservice distributions because IRS rules allow it.

Answer 4

False. Many employer plans do not allow it. If they do, they limit it to participants over 59 1/2 (MedAmerica)

Question 5

Which of the following are eligible for avoidance of tax and penalties by means of a 60 day rollover?

1. IRA distributions
2. Employer plan indirect rollovers
3. Employer plan Inservice distributions

Answer 5

All of the above. With employer plan indirect rollovers and Inservice distributions, mandatory withholding of 20% forces the recipient to use and outside source of funds to make a complete 60 day rollover.

Question 6

T or F - In California, indirect rollovers and Inservice distributions require both Federal and State income tax withholding.

Answer 6

?

Question 7

Assuming a employer retirement plan allows for in-service withdrawals, what is the tax treatment of the amount distributed to the participant?

Answer 7

Age less than 59 1/2 - If the participant is less than 59 1/2, then the distribution will subject to income tax plus 10% penalty unless rolled over into an IRA or another employer plan within 60 days. The 10% penalty may be waived if there is a qualifying event/situation. There will be 20% withholding.

Age 59 1/2 and above - Same treatment except the 10% penalty would not apply.

Question 8

T or F

Distributions from all qualified retirement plans are subject to 20% mandatory withholding, while IRA distributions are not.

Answer 8

True

For IRA distributions that will not be rolled over, the IRA owner may opt for withholding as a practical tax planning strategy.