Indirect rollover of annuitized 403b two-tier annuities

Submitted by Rick McCallister on Fri, 2020-01-24 17:17

I have a retired client with two old two-tier non-erisa 403(b) annuities. The annuity company says they will not send the payments to another custodian for a direct rollover, instead they will only send payments directly to the owner. The owner is 66 and the insurance company will allow the contracts to be annuitized over 3 years. We want to indirectly roll both contracts 3-year annuitization payments to an IRA.

I believe because the payments would be rolled from a 403(b) plan to an IRA the 1 per year IRA to IRA limit won’t apply. I also believe that because the 403(b) payments are coming out in 3 equal periodic payments that the insurance company is not required to withhold any tax.

Can anyone confirm my thinking is correct? Thank you!



Submitted by Alan - IRA critic on Fri, 2020-01-24 18:30

  • Since the payments are for only 3 years, and the last payment will be made prior to RMDs, they should be eligible rollover distributions (ERDs). An ERD is subject to mandatory 20% federal withholding, but is not subject to the one rollover limit per 12 months.
  • Was client specifically denied a lump sum direct rollover?  If so, there must be some characteristic of this plan that exempts them from the direct rollover requirement.

Submitted by Rick McCallister on Mon, 2020-02-03 20:44

Thank you! I would like to clarify one thing. I believe that an exception exists for withholding when the payments are a specified series of equal payments – which I believe a 3 year annuitization would qualify for. Here is a link: https://taxmap.irs.gov/taxmap2015/pubs/p15a-007.htm Do you believe I’m interpreting this correctly? Thanks.

Submitted by Alan - IRA critic on Mon, 2020-02-03 23:44

  • The definition of an ERD excepts a specified series of equal payments, but that is defined as lasting at least 10 years. Therefore, 3 years is not long enough to qualify for this exception, and these payments are therefore ERDs. Once a distribution is an ERD, the mandatory 20% WH trumps all the other options.
  • That does not mean that the client could not replace the withholding with other funds by rolling the withhheld amount over to his IRA. The 20% might cover any amount client is now paying in estimates, so perhaps there is a way to let the 20% replace any other tax payments so that client is effectively just using money that would have gone to tax payments to complete these rollovers. It would not be that inconvenient since client intends to do 60 day rollovers anyway.

Submitted by Rick McCallister on Tue, 2020-02-04 16:57

Thank you for your time!

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