Can a 403b account become “isolated” from an employer?
I’m a financial advisor and have never encountered this fact pattern before. In the 1980s and 1990s it was common that college faculty would do the following. You would make your 403b contributions to the best choice on the employer vendor list, even if all were mediocre. Then, periodically, you would do a 403b to 403b transfer to a mutual fund company not on that list and empty out that account. This was easy and the paperwork was simple. You couldn’t make new contributions to this new 403b account. You needed to continue contributions to the original account and now and then you could do another tranfer if you desired. The idea being to work around the employer’s list and get your money in better investments.
I have had many clients like that over the years. Upon retirement and termination of service, many then roll this 403b money or some of it, often from multiple 403b accounts depending upon their career employment history, into one IRA for convenience in management.
What’s new this time around is I have my first faculty client that did this many years ago and *also is continuing in full-time employment at that university past the 71.5 RBD* (if take a double distriubtion). Typically 403b would allow to the later of then or termination of service.
I’m totally comfortable letting this client postpone RMDs for the 403b account that is directlly linked to her current employer and that she contributes to. However, this 403b that she did a transfer to years ago is sort of an “isolated” account. Although the application did have to bear the name of her employer, that was all. Could the IRS potentially say that this particular 403b account should start RMDs at the normal RBD because it’s not strictly part of her current in-service employer plan per se?
Before all the portability rules with 403b were enacted recently, we would merely have transferred this back to where it came from to avoid this ackward situation, but that no longer works due to strict rules about employer-approved 403b vendors and information sharing agreements.
Permalink Submitted by Alan - IRA critic on Fri, 2013-10-04 03:13
Any former employer’s 403b plan will be subject to RMDs at 70.5 (or 75 for “old money”) if the employee is no longer working for the plan sponsor. However, current portability rules allow the current 403b plan to accept rollovers from a variety of other plans such as 401k and IRA accounts as well as other 403b plans. While current plans are not required to accept such rollovers, if they will accept them it is possible to postpone RMDs for years after the rollover on all these plans as long as the employee remains working for the current plan sponsor.
Permalink Submitted by Bob Bollinger on Fri, 2013-10-04 14:45
Perhaps I can clarify my question some. Let’s say you’ve been employed at XYZ University and still work full time there and attain 70.5 this year and 71.5 next year. You’ve been contributing to it’s 403b plan for many years and still do. It’s investment choices are mediocre. Now and then over the years, you transferred out what you had accumulated to a 403b brokerage account. This permitted you to have access to thousands of mutual funds of every type imaginable and manage your portfolio that way you wanted. The brokerage firm was never and is not now on your employer-approved vendor list. There is no “link” between this brokerage account and your employer in any strict sense, other than on the brokerage application years ago you had to reveal that you were an employee of this university and of course title the account 403b with the custodian used by the brokerage firm. I might add that doing that today isn’t permitted–there are much more formal requirements to be able to do a 403b to 403b transfer and in most cases a scenario such as I’ve described is no longer possible. But these old accounts exist. You plan to work well into your 70s and enjoy knowing you don’t have to start RMDs on 403b money “at your current service employer”. Yet–does this isolated brokerage account from years back also fall into this postpone the RMD category? It was funded by a transfer from the employer at which you currently work. This isn’t a question about transferring money from one place to another.