Defined Pension Annuity Payments to Roth IRA
I’ve been reading IRS Notice 2009-75 and am working on understanding it better.
The situation is where defined benefit (Qualified Retirement Plan-100% company contributions) annuity payments (under 408b?) are available now for early retirement (age 57) but no lump sum is offered.
If a lump sum was offered, the employee would roll it to an IRA.
Income for 2009 will be less than $100,00.
In 2009, employee was laid off (but actively looking for employment) and marginal income tax bracket (15%-max) will be lowest employee has experienced in 10+ years.
It’s been my understanding that,in the past,
1. the defined benefit annuity payments are included 100% in gross income- so taxed-and
2. the payments can not be rolled to a Traditional IRA or Roth IRA.
According to IRS Notice 2009-75, —
1. can the monthly payments now go directly from the Defined Benefit Plan Trustee to a Traditional IRA (avoid taxation) or Roth IRA (Rollover/Trustee to Trustee transfer)?
2. if payments can only go to the employee, in the employees name, can they, in turn, be deposited to a Roth?
What are your thoughts?
Thanks for your help
Permalink Submitted by Alan Spross on Tue, 2009-10-27 23:49
Heidi,
Note that 2009-75 only addresses direct Roth conversions from eligible rollover distributions per Sec 824 of the PPA.
If this annuity income stream is based on life expectancy or actually any period longer than 10 years, these distributions are not considered rollover eligible, and therefore must remain as taxable distributions.
On the positive side, at least these annuity payments provide income exempt from the early distribution penalty if employee needs the money. If they don’t need the money, they can often delay the start of payments and when they begin, the payments will be larger, much like delaying SS retirement benefits.
But you might verify the payout assumptions to be sure that there is not some option that would be rollover eligible due to being paid over a period of less than 10 years.
Permalink Submitted by Heidi Davis on Wed, 2009-10-28 00:07
OK-
Thanks for your time, Alan.
I’ll check on the less than 10 year payout option.
Heidi
Permalink Submitted by Heidi Davis on Thu, 2009-10-29 00:14
I looked up Section 824 of the Pension Protection Act to find a definition of “eligible rollover distributions”.
You mentioned that 2009-75 doesn’t cover this qualified defined benefit annuity payment plan- rollovers, then, are not “eligible”.
I’m triing to deceifer the 824 wording/intention.
The wording includes defined benefit pension plan and annuity plans—is it referring to only those with employee CONTRIBUTIONS ?
This plan is 100% Company funded-so it doesn’t fit?
Is that the rationale?
Heidi
Permalink Submitted by Alan Spross on Thu, 2009-10-29 02:36
Sec 824 can include a DB plan that offers a lump sum distribution, but not those that payout as annuities over period over 10 years. Below is the definition of an eligible rollover distribution from Sec 402c. If an eligible plan issues an eligible rollover distribution, then a rollover or conversion can be completed.
The problem here is that the plan is paying substantially equal periodic payments for life rather than a lump sum distribution, and that type of payment is not eligible. Definition of eligible rollover distribution copied below:
>>>>>>>>>>.
(4) Eligible rollover distribution
For purposes of this subsection, the term “eligible rollover distribution” means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust; except that such term shall not include –
(A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made –
(i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or
(ii) for a specified period of 10 years or more,
(B) any distribution to the extent such distribution is required under section 401(a)(9), and
(C) any distribution which is made upon hardship of the employee.
>>>>>>>>>>>>
Permalink Submitted by Heidi Davis on Thu, 2009-10-29 21:43
OK–
Very helpful!
Thanks, Alan
Heidi