10 year income averaging from a qualified plan to a Roth IRA | Ed Slott and Company, LLC

10 year income averaging from a qualified plan to a Roth IRA

The situation is as follows: 1) Money taken out of a qualified plan and put into a rollover IRA conduit for a person born before 1936. (eligible for 10 year one-time averaging for money taken out of a qualified plan) 2) Money is now to be put into a qualified plan directly from the IRA conduit. 3) Money is then to be taken out on a one-time basis the following week to be put into a Roth IRA and income averaging is planned. Questions: 1) Can we use income averaging for money taken out of a qualified plan and put into a Roth IRA? 2) Even tho we know that money can come out of a qualified plan and be parked in a conduit plan until it can be put back into a qualified plan, can that same money, after it is back in a qualified plan, be income averaged? There is some discussion that once money comes out of a qualified plan, it can never be income averaged. This seems silly as the purpose of the conduit is to be able to put it back in the qualified plan. Bill Seiden

As far as I know "10 year income averaging" out of a qualified plan can only occur when the money leaves the tax deferred status ie. does not enter any type of IRA plan. Where is your source that it applies in a rollover or conversion? pko

pko is correct. This is clarified in Notice 2009-75 attached, top of p 7. Both NUA and other optional methods have never been applicable to funds eventually rolled to a TIRA within 60 days, and this Notice extends that ruling to Roth conversions.

Thanks to pko and alan-oniras. I appreciate the replies and references. What about the second question - can we transfer monies from a conduit IRA (originally in a qualified plan) to a new qualified plan and still use 10 year averaging? Bill Seiden

Yes, you can do that and therefore a benefit of the conduit IRA remained even after the portability changes of 2002. The TIRA account in the case becomes a holding tank for the qualified funds until they can be transferred to a subsequent employer plan. Of course, the following LSD from the new plan must meet all the stringent qualifications for LSDs using the 20% capital gain election or 10 year tax option.

It is interesting to find a question regarding 10-year averaging. The method is only available to individuals who were age 50 or more on January 1, 1986 and had not previously used the benefit. Such a person who have passed age 70.5 and started requirmed minimum distributions using the value of a conduit IRA as one of the accounts to consider. Or if still working, no RMDs would be required until after they retire (unless they own 5% or more fo the employer) - that's a relatively small population as well. I wonder if anyone knows just how many people will qualify for 10-year averaging. The beneficiary of someone who met the criteria also qualifies for 10-year averaging of a lump sum, so there are a few younger people who can still take advantage of the provision.

I think the reality of it is that most are looking to find some type of "edge" or "loophole' and thus ignore and misread and some of the critical requirements to use this procedure..... pko

Following up with PKO or anyone else, I will be transferring money from a conduit IRA into the qualified plan one day and taking a lump sum distribution the next day. Anyone see a problem with the short time in the qualified plan? B

se2: I am not an expert on this topic, but I found this link which answers some interesting questions: http://www.wwwebtax.com/income/lump_sum_distributions.htm bullet point #2 seems interesting? I would also point out that a mandatory 20% withholding would apply. If I were you, I would do some searches on the net about this topic. There are tons of articles. Also http://www.irs.gov can provide you with the actual Publication 575 and Notice (alan mentioned) where this is discussed. pko

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