Advanced Underwriting Consultants

Question of the Day – October 18

Ask the Experts!

Here’s the question of the day.

Question:  My client is a policy officer who just retired at age 50.  His former employer sponsors a Section 457 plan and a Section 401a plan.  If the client rolls over the 401a plan to the 457 plan, will subsequent distributions from the 457 plan be exempt from the 10% penalty tax?

Answer:  Yes.

Normally, a rollover to a governmental Section 457 plan must be accounted for separately, and distributions from that rollover (or earnings thereon) prior to age 59 ½ will be subject to the penalty tax.  Here’s an excerpt from IRS Publication 558:

To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions of these funds. Early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. The term “qualified retirement plan” means:

  • A qualified employee plan under section 401(a), such as a section 401(k) plan
  • A qualified employee annuity plan under section 403(a)
  • A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or
  • An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs)

While an eligible State or local government section 457 deferred compensation plan is not a qualified retirement plan, any distribution attributable to amounts the plan received in a direct transfer or rollover from one of the qualified retirement plans listed above would be subject to the 10% additional tax.

However, the 401a account balance is exempt from the 10% penalty tax because it qualifies for the age 50 public safety employee exception to the penalty tax rule.  Therefore, distributions from the rollover will be penalty tax free.

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. 

Question of the Day – March 30

Ask the Experts!

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

Question: My unmarried client wants to contribute to a deductible traditional IRA this year, but she is a participant in a governmental Section 457 plan.  Is she an active participant in a qualified plan, making her ability to contribute to an IRA potentially subject to phase-out based on income?

Answer: No.

Participation in a 457(b) plan maintained by a government or a non-profit is not taken into consideration when determining if an employee is an active member of a plan for deductible IRA contribution purposes.

Here’s an excerpt from IRC Section 219(g)(5)

An eligible deferred compensation plan (within
the meaning of section 457(b)) shall not be treated as a plan
described in subparagraph (A)(iii).

The client may contribute up to $5,000 to a deductible IRA for 2011 if younger than 50, or $6,000 if 50 or older.

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.