Q:

Subject:  Question about IRA's

Hi Kerry,

 

I have a friend who is a nurse at a hospital in Berkeley.

 

She has two IRA accounts....one is noted as a 403(b)

 

The other one has nothing to indicate what it is, so we are assuming that it is a traditional type IRA, tax defered account.

 

Naturally both of her accounts are losing her money and she wants to roll-over both these accounts into some other tax defered plan.   Both the broker(manager) and her human resources dept. are telling her that she cannot remove funds from either account until she turns 59 1/2 yrs old (this December).  (assuming that she doesn't quit her job) 

 

They say that taking either account to "cash" and mailing the money direct to the "new fund" would still be a taxable event because she hasn't turned 59 1/2 yet. 

 

Actually....the manager said that she could take the 403(b) to another fund and she wouldn't be taxed....and the HR Dept said that was wrong even transfering the 403(b) would be taxable.

 

Since she isn't quiting her job.....then there isn't a "distributable event".....

 

YOU ARE THE GURU......PLEASE ENLIGHTEN US.

 

Many Thanks,

A:

I'm not really a fan of second hand tax advice.  Your friend really needs to work with her own personal professional tax advisor in order to work out the best plan for her unique circumstances.  However, there are some good issues here that will make for an interesting blog post, so the following comments are more general than she really needs.

A 403(b) account is basically the non-profit equivalent to the 401(k) deferred compensation retirement savings account that many for-profit companies offer their employees.

What seems to be the confusion is the fact that there are very different rules for IRS in regard to what kinds of things would be taxable and the rules that are established by the administrator of the retirement accounts.  In most cases, the paperwork that employees sign when enrolling in employer sponsored plans is much more restrictive in regard to withdrawals and loans than the IRS rules are.

Thus, I can only discuss the IRS rules with any confidence.  She will have to review her plan documents to see what restrictions she has agreed to, such as not moving the money while she is still employed there.

For IRS, any person is allowed to roll over their retirement assets from any tax deferred account, such as 403(b) and conventional IRA accounts whenever the person feels it to be in her best interest.  With a direct custodian to custodian transfer, the full amount is rolled over to the new account, without anything being withheld for income taxes.

However, if she were to take a check for the withdrawal, she has 60 days to roll it over into a new retirement account, or even multiple accounts if she feels it best to diversify. In this kind of situation, because there is no absolute guarantee that the employee will actually deposit the money into a new retirement account, IRS requires that the first custodian withhold 20% of the withdrawn amount and send it to them just like Federal income taxes withheld from paychecks.  This amount can then be claimed as a credit on the person's next 1040.  The big problem that arises is that for a completely 100% tax free rollover, the person will have to use other funds to make up for the 20% that was withheld or else it will be considered a taxable withdrawal.

As an observation, I have noticed over the past few years a number of cases where clients doing withdrawals from their retirement accounts did not have any taxes withheld and were thus able to easily deposit the full amounts into their new accounts.  For some reason, their old employers and/or plan custodians were being nice guys and ignoring the IRS withholding requirement, which isn't always the case.

Rollovers of retirement accounts can be done at any age.  Anyone claiming that only people over 59.5 years old are eligible for tax free rollovers is seriously ill-informed. The 59.5 years of age threshold is only important when taking out taxable withdrawals because if none of the exceptions applies, there will be early withdrawal penalties for both IRS and FTB.

So, in summary, IRS will allow a tax free rollover at any age.  Any restriction on such a move would be in the plan's governing documents. Her own professional tax advisor should review those documents to see if she did formally agree to such restrictions.

In similar cases I have seen, where someone has been locked into a money losing retirement account, the next best thing to a rollover is to stop any new contributions to it by amending her agreement with the payroll department and diverting that money into another retirement account, such as one of the IRA plans.

I hope this helps.

Kerry

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Labels: Retire

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/20/2008 09:07:00 PM Send this post: