Defined Benefit Plan to IRA
I have a 63 year old client and she would like to move her Defined Benefit Plan to an IRA. Is this legal and can it be done as a trustee to trustee transfer? I believe it is but she does not think so. Does anybody have any concrete website or something that I can show her if it is a legal transaction. She is making me doubt myself now.
Thank you for you help.
Permalink Submitted by Alan Spross on Sun, 2010-10-03 04:18
I assume she is being offered a lump sum option for all or part of this plan, and you are referring to that lump sum. If so, this is done all the time as the lump sum is an eligible rollover distribution. It could go to a TIRA in a direct rollover or to a Roth IRA as a 2010 conversion with taxes deferred to 2011 and 2012. If she wants to split it, probably best to roll the entire amount to a TIRA and convert from there.
If the plan has no option other than monthly annuitized benefits for life, those payments are NOT eligible for rollover because they are paid for life (See below).
The following is copied from the IRS Reg defining an eligible rollover distribution in Sec 402(c)2, Q&A 3:
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Q–3: What is an eligible rollover distribution?
A–3: (a) General rule. Unless specifically excluded, an eligible rollover distribution means any distribution to an employee (or to a spousal distributee described in Q&A–12(a) of this section) of all or any portion of the balance to the credit of the employee in a qualified plan. Thus, except as specifically provided in Q&A–4(b) of this section, any amount distributed to an employee (or such a spousal distributee) from a qualified plan is an eligible rollover distribution, regardless of whether it is a distribution of a benefit that is protected under section 411(d)(6).
(b) Exceptions. An eligible rollover distribution does not include the following:
(1) Any distribution that is one of a series of substantially equal periodic payments made (not less frequently than annually) over any one of the following periods—
(i) The life of the employee (or the joint lives of the employee and the employee’s designated beneficiary);
(ii) The life expectancy of the employee (or the joint life and last survivor expectancy of the employee and the employee’s designated beneficiary); or
(iii) A specified period of ten years or more;
(2) Any distribution to the extent the distribution is a required minimum distribution under section 401(a)(9); or
(3) The portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation described in section 402(e)(4)). Thus, for example, an eligible rollover distribution does not include the portion of any distribution that is excludible from gross income under section 72 as a return of the employee’s investment in the contract (e.g., a return of the employee’s after-tax contributions), but does include net unrealized appreciation.
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