Advanced Underwriting Consultants

Ask the Experts – May 9

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: When an IRA is rolled over to a Section 457(b) plan, do the RMD rules for IRAs or for Section 457(b) plans govern the separately-accounted-for IRA funds?

Answer: The RMD rules for Section 457(b) plans would apply—not the RMD rules for IRAs—even though IRA rollovers to Section 457(b) plans must be separately accounted for.

This question comes up because if an individual rolls an IRA into a Section 457(b) plan, the plan must separately account for the rollover contribution inside of the Section 457(b) plan. However, the fact that rollover contributions are separate does not affect the distribution rules for Section 457(b) plans.

Under Section 457(d)(2), the same distribution rules that apply for Section 401(a)/(k) plans also apply for Section 457(b) plans. Therefore, if an IRA is rolled over to a Section 457(b) plan, the funds are not required to be distributed until the later of the plan participant turning 70 ½ or his retirement. This is different from IRA required distributions which must commence by the date the owner turns 70 ½.

The separate accounting rule was not enacted so the IRA rollover contribution would retain all of the IRA rules. Instead, the separate accounting rule is on the books to make sure participants can’t avoid the 10% penalty rule under Section 72(t), which applies to IRAs—not Section 457(b) plans.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.