Dick and Eric examine the IRA to annuity transfer process and discuss some of the challenges and misconceptions that they have encountered when speaking with clients.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

401K, 457 & 403B to IRA ANNUITY ROLLOVERS
RULES CHANGE for IN-SERVICE 401(k) ROLLOVERS
401k, 457 & 403B to Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead such as combining the safety and growth of a Fixed Annuity with the tax free benefits of the Roth IRA.
As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.

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Annuity Guys® Video Transcript:

Dick: Eric, I say here we go again.

Eric: Sounds like a song title.

Dick: This is something that we continue to work with clients on, and that is the question of IRAs and just the concerns they have about moving an IRA into an annuity. There are a lot of practical things, whether or not it’s a 401k or an IRA that someone wants to go into an annuity. There’s a lot of questions that come up. One is, does it even make sense to move an IRA or a 401k into an annuity?

Eric: Right. Obviously, yes, because the annuity is designed for lifetime income, and that’s usually when people are saving from their 401K or IRA. The goal is to get money to retirement, and that’s what an annuity does. There are a lot of common misconceptions, I should say, with when those transfers happen when you’re moving from one qualified product, like and IRA or 401k, and moving that into an annuity.

Dick: Many times, folks, I’ve had different ones ask me, believing they were going to have to pay tax if they put their IRA or their 401k into an annuity.

Eric: The misconception is because they think they’re taking a withdrawal. This is where terminology gets so complicated with financial lingo. You’re withdrawing from your IRA or your 401K.

Dick: It’s actually like a lateral move.

Eric: Right, it’s like a transfer, is the more appropriate term, because you’re actually transferring from . . .

Dick: Moving it from custodian-to-custodian or rolling it over.

Eric: Which is not the guy at the gymnasium at the high school.

Dick: Or the janitor, or the 60-day rollover which is popular. You can do it either way and both ways have some advantages and disadvantages. Let’s talk about those, but first of all, let’s just touch on what is a custodian?

Eric: It’s the guy, or in this case the institution, who is charge of the paperwork. They’re in charge of making sure what gets filed with the IRS is appropriate. They’ve got your qualified dollars, and they’re reporting for you. They’re telling the IRS this is what you took out, [inaudible: 02:20].

Dick: They have accepted this responsibility that’s put on them by the Federal Government if they want to be a custodian.

Eric: Right. In order to manage qualified dollars, it has to be a custodian who’s in charge of the report.

Dick: The next thing that we probably want to talk about is a 60-day rollover versus a transfer.

Eric: A 60-day rollover is basically the timing. When you have one IRA, if you’ve made a distribution, you have 60 days, basically, to put it into another product, so it’s a timing aspect.

Dick: Right. The transfer; we’re talking about just going from one custodian to the other custodian. There’s some pluses and minuses to both of these, and let me try to be fair to both of these. You can fix me.

Eric: Each of us has a preference. My preference has always been the custodian-to-custodian transfer.

Dick: Right, and mine has been the 60-day rollover.

Eric: I like the custodian-to-custodian because the paperwork, basically, is handled by the custodian. Their job is to make sure all the numbers match up, so when they’re reporting from one custodian to the next, that gets taken care of.

Dick: Unfortunately . . .

Eric: They’re two big institutions; typically they’re big institutions. It typically takes longer, you have more people involved, so you have to have a good flow of communication to make sure there aren’t any glips, clips, or mistakes along the way. It’s worked well for me; I haven’t had a problem.

Dick: What I found, because I have done both and do both, is that with the transfer process, it does take quite a bit longer. Typically, I hate to say this, but you’ve got usually two clerks working from one company to the other. You got a lot of paperwork, and a lot of times, there are just different things that happen along the way that delay or postpone.

The 60-day rollover, if it’s applicable, it’s not always applicable to do this, but the nice thing about the 60-day rollover is that when the client calls the company where the money is at, has the check made out to their name. When I say ‘to their name’, to their client’s name, then the check will go directly when they receive it, usually sent some type of overnight delivery, so they’ve got a tracking number. Then that check will be sent directly to the company; pay to the order of the company. Typically, that process takes about a week, week and a half, and the client knows every step of the way where the money is, what’s going on, but there is a little additional reporting at the end of the year. You have to notify the IRS on your tax return that you did a rollover.

Eric: What has happened is you’ve technically made a withdrawal from Company 1, and then did the rollover process manually. You have to, or your accountant, needs to report on your tax return exactly that that process took place. Occasionally, the IRS will come knocking at your door if it wasn’t filled out properly. That’s one step that I . . .

Dick: You want to have some documentation. You want to have the date on the check, when you received the check, and you want to have the date on when the money arrived at the new custodian.

Eric: Both are basically ways that you can do it.

Dick: Sometimes, it just comes down to personal preference, and what the client is comfortable with. What are some other concerns that we run into quite a bit?

Eric: I shouldn’t say the concerns, but there’s how people are able to move dollars, and when they’re able to move dollars. A lot of times, people aren’t aware that, especially the new plans have the opportunity to do an in-service, distribution withdrawal. You have the opportunity to actually move money out of a 401k plan.

Dick: If you’re still working, yes.

Eric: What’s typically common for a lot of 401K plans, they don’t give you a whole lot of more conservative options.

Dick: Right. They don’t have that variety; they don’t have the pension-style income that the annuity provides.

Eric: Some people want that comfort level of being able to take a certain amount of dollars out, put them in a product that they know when they turn it on for retirement, it’s going to give them a number, and they’re more comfortable with that than having those dollars in the market area at risk. That’s one aspect, the in-service withdrawal.

Dick: Another thing that I would like to bring up about 401K, which is different than the IRA, when you call the custodian on the 401K, if you would like to do a rollover on that, you actually can do a rollover, but unfortunately, they want to withhold 20%. The IRS makes custodians withhold 20% of 401Ks. It really is better, I found, in all cases to do a transfer on a 401K, even if it does involve delays or takes longer.

Eric: What we’re seeing more and more commonly now is because people are changing jobs more frequently, when you’re leaving one company’s 401K, they usually don’t want you to park your dollars there, so they want you to move out because they’re paying the administrative fee.

A lot of times, you’ll see people moving from a 401K to a self-directed IRA. You’ll have those transfers going on and that is usually, in my experience, more easily done with a custodian-to-custodian transfer of paperwork. As you said, then you don’t have to worry about the withholding or any of those issues.

Dick: Exactly. Another thing that we run into is RMDs.

Eric: Yes. For those of you who do not know what RMDs are, it’s not some kind of weapon of mass destruction, it’s what it sounds like, but they’re required minimum distributions.

Dick: Withdrawals that are required at a certain age.

Eric: Yes. This is one of the things that . . . with 401Ks, you do have withdrawal requirements at age 70½, unless you’re still working or . . . and this is a new one for us we’ve been talking about, you’re over a 5% owner of the company. Then you still have to have that RMD. That’s the little tweak there.

Dick: Tricky little laws here. Folks, we’re not, Eric and I want to make it very clear, we’re not accountants.

Eric: No. We don’t play them on television, despite the size of the screen here.

Dick: We don’t give tax advice. What we’re giving here is a general overview and understanding of how annuities generally, conceptually function with IRAs and 401Ks.

Eric: Correct.

Dick: One think that I’ve run into, Eric, a couple things on RMDs I should say, is that if someone is at that age; they’re at 70½ or past that age, had their first birthday after 70½. If they haven’t had the RMD taken out at the present company, then they have to make that that money gets taken out of the IRA at the new company. They have to make a decision; does the company where it’s at presently take it out or does the money move over, and then come out at the new company? It’s fair to do it either way.

Eric: Right. It’s just a matter of reporting. Of course, with IRAs, you don’t have to . . . if you have multiple IRAs in different locations, you don’t have to take it out of each and every one. You can choose to take it out of just one location versus all the others.

Dick: You figure what’s owed in your RMD on each annuity or each IRA account, and then you can add it all up and take it all out of one account.

Eric: I think this is where people say, “How much am I going to owe?” We should say RMDs are calculated based off of the end-of-year of the prior year, and then it’s based off of your age and a percentage; the formula the IRS puts us out there.

Dick: It’s in Publication 590, the unified tax tables, and there’s 3 different tables, depending on the age of your spouse and that type of thing. One thing that I found, Eric, that a lot of times it’s a misconception on the RMDs, a lot folks believe that once they turn this magic age, about 71-years-old, that they have to take large amounts out of their IRA and pay the tax, or they have to take it all out, which is really a misconception that I wouldn’t think would be out there, but I hear it quite a bit. The fact of the matter is that your initial first RMD is about 3.65%. We always say 3.5%, but it actually is about 3.65%, when you figure it, and then it graduates up from there. I’ve always said, “If the IRS has a choice . . .” folks, what do you think they’re going to do? You think they’re going to make the formula very simple, like just tell you the percentage, or do you think they’re going to make it complicated and make you do math with a divisor? They give you a table, a divisor, and that withdrawal rate goes up with your age, so that each year you’re taking a little more out, a little more out. By time you’re up in your 90s you’re getting your IRA pretty well depleted.

Eric: This is where that custodian comes into play. When you’re working with a company that you have an IRA with, if you have questions about the amount you need to take out, contact the custodian because they’ll do the math for you, because they want to keep you in compliance, as well.

Dick: What I want to go back to, Eric, is does it really make sense to move your IRA into an annuity?

Eric: For me, I like the idea of taking IRAs and 401Ks that have basically . . . they’ve been saved for the purpose of retirement income.

Dick: In many situations they have.

Eric: That’s what I’m saying, if they’ve been saved, and that’s the intent for these dollars, what does annuity do? It gives you lifetime income for that portion of your money. Are we saying move all of your IRA dollars or all your 401K dollars into an annuity? No, not necessarily. It’s taking what you need for that foundational aspect.

Dick: That has to be determined.

Eric: Create your own personal pension. Everybody likes the idea of having **guaranteed life time income. I don’t think anybody’s ever said, “That sounds awful”.

Dick: Most people choose it when they have that option and they’re leaving employment.

Eric: I have a family of educators; they all fight for their pensions. They love their pensions. That’s one aspect that people miss now in this 401K world, they don’t have that pension. The responsibility’s on you. This is one way of taking some of that responsibility and making it shared by having insurance on your life; you’re **guaranteeing your income.

Dick: When someone chooses to put their IRA into an annuity, one thing that they should be aware of, and that is you’re not doing it because you’re looking for tax deferral. You already have tax deferral. You’re doing it for other reasons: You’re doing it because you want security; you want a , perhaps some type of a hedge against inflation. That’s the reasons why you would do it; the sound reasons why you would do it. I believe that the idea would be to put as little as possible into an annuity to create the foundational income that’s necessary. It’s good to be able to calculate that out, forecast your cash flow needs, and know that you’ve got this portion of this portfolio setup for your income.

Eric: Right, it’s covering that foundation so that you’re comfortable. You know you’ve got that covered. Sounds like an excellent choice.

Dick: I agree. Thanks for joining us, folks.

Eric: You have a wonderful day.

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