Pre-1987 403b required distributions
My 403b has Pre-1987 contributions. When I turned 75 in 2007, distributions were made from both Pre and Post 1987 monies. The Post-1987 RMD was done correctly using the Universal Life Expectancy Table for that particular year. I requested an explanation from the insurance company (VALIC-owned by AIG ) as to how the Pre-1987 distribution for 2007 was calculated. They replied that the Pre-1987 distribution was based on the “50% Rule”. They used a life expectancy Factor of (single) 13.4. I cannot find any IRS information on this except in Table 1 (Single Life Expectancy, For Use by Beneficiaries) which uses that Factor. To this day I cannot get a direct answer from them as they don’t allow me (or perhaps anyone) to talk to that department directly. Everything is done by snail mail which is excruciatingly slow (days into weeks). I requested information 11 days ago as I believed the distribution check they sent me in October may be inaccurate. I was told today when I called them that it may be a couple more weeks before I get a letter from them. I am hoping that you will be able to shed light on how the calculation is determined. To complicate matters I rolled over a partial amount from my 403b in 2008, (considerably more than the balance of the Pre-1987 account) into an IRA, and that was then converted to a Roth before 12-31-08. I am led to believe from a previous post on this site that that action would end the Pre-1987 account as removal of money would come out first from the Pre-1987 account. However, they sent my total distribution for 2010 from both accounts. Because of their lack of cooperation, I do not know how much money is in either one, only the total balance of my 403b is sent to me on my quarterly statements. Please help!
Permalink Submitted by Alan Spross on Sat, 2010-11-13 01:53
I think they have messed things up.
When you did the rollover in 2008, you erased your grandfathered (aka old money) balance in the plan because distributions in excess of RMD are deemed to come first from the balance. When you did that rollover the plan should have distributed your 2008 RMD to you using the 2002 RMD ruling divisors for the post 86 money and the 50% rule for the pre 87 balance as of 12/31/06. The 50% rule is based on IRS letter rulings stating that the old money RMD should be based on requiring 50% of the account to be distributed during your remaining life expectancy and the other 50% should be theoretically available to your beneficiaries. 13.4 appears to be too low a divisor (too high an RMD) under those guidelines, but that part probably not subject to any recourse at this point.
In 2008, your RMD had to be distributed prior to the rollover you did, and again it would be based on a divisor of 22.0 on the post 86 balance and the aforementioned 50% rule on the pre 87 balance. But when you did the 2008 rollover, you then effectively erased what was left of the pre 87 balance. On 12/31/08 your remaining balance was all “new money” (post 86) and subject fully to the 2002 RMD ruling.
In 2009, RMDs were waived. This year (age 78) your RMD should be based on a divisor of 20.3 for the entire 12/31/09 balance since the old money balance was eliminated with the rollover.
I suspect that the 13.4 divisor they used in 2007 was too high, and the same for whatever they used in 2008. Probably too late to do anything about that now. But for this year, you should dig in and demand that they use a divisor on 20.3 on the entire 12/31/09 balance since it is very clear that the pre 87 balance is gone and they should no longer have two accounts.
If they insist that there should still be two accounts, it could only be due to some IRS ruling that terminates the ruling that old money be distributed first at age 75 and perhaps uses a pro rated approach after age 75. I am not aware of such a ruling, but perhaps they can establish why they still maintain two accounts. I am also mystified why they would produce a higher RMD on the old money if 50% of it is to be preserved for beneficiaries. But being that this is their business, they may well be able to justify their calculations, but from what I can tell this does not sound right.
Permalink Submitted by Bunny Keller on Sat, 2010-11-13 05:35
To Alan-oniras: It is such a pleasure to communicate with someone who knows what he is talking about. Thank you immensely for your very prompt reply. You have confirmed what I researched in the Federal Register back in 2002. At that time, I had to (by Wisconsin law) do a transfer of my State Teachers Retirement Account having reached 70 years of age in 2002. Having plugged a relatively small amount of money into Valic when I was still employed made it easy to do a trustee to trustee transfer from the State of Wisconsin to Valic. There have been no fees to pay, and interest rates performed admirably in this account especially in down times, like the recent recession. In 2002, I did have considerable problems with the State miscalculating my first RMD. The State was using the wrong table (like Valic is doing now) and it took much persistence and talking and writing back and forth to straighten it all out. It took over three months but was finally resolved correctly. I saved all that correspondence including the Federal Register sections that I used at that time to point our their errors. Since my Pre-1987 distributions didn’t kick in until I reached 75, these latest problems have yet to be resolved with Valic. There is no transparency with Valic and no direct communication. Since you have confirmed that you think they have “messed things up” and have written clearly what should have been done, I would like to use your post with your permission in a letter to the powers that be. Your explanation was very clear, and I tend to get upset and loud on the phone with their customer service person when I can’t get these points across to them. They just don’t know what I am talking about so it is very frustrating. Again, my sincere thanks for your expertise! Helen
Permalink Submitted by Alan Spross on Sat, 2010-11-13 19:58
Permission granted, and good luck. Try to bypass the basic service Reps to get to their local technical referral source if you can.