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Slott Report Mailbag: What Part of My Lump Sum Distribution is an Eligible Rollover Distribution?

This week's Slott Report Mailbag looks at retirement plan distributions and moving money to tax-free territory. We dissect these two issues below, and remember, if you have a question make sure to email us at mailbag@irahelp.com.  As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

Enjoy your articles greatly.

IRA and retirement planning questions
Send questions to mailbag@irahelp.com

My question is, say I am 63, receiving Social Security and a pension. My wife is 5 years younger. We both had company 401(k)s.

When she retires, I figure her Social Security, 401(k) distributions and pension may throw us to the 25% tax bracket.

What I want to do is take $30,000 distributions from my 401(k), figuring to use about $10,000 of it. I want to throw the excess $20,000 into my existing Roth IRA so that I have some more tax-free income in the future when we may be at the 25% tax bracket.

Is this allowed and are there any limits?

Thanks

Rich McBride

Answer:
You can convert any amount of your 401(k) distribution to a Roth IRA. There are no dollar limits on the amount of money that can be converted to a Roth IRA nor are there any income limits that would prevent you from doing a conversion. The amount converted will be taxable. It is considered ordinary income and can push you into a higher tax bracket. It can also affect your deductions, credits, exemptions and phase-outs. If, after doing your tax return for 2013, you decide that the conversion is no longer what you want to do, you can undo (recharacterize) all or some of the converted amount up to October 15, 2014.

2.

A pension plan participant has been receiving monthly payments during 2013.

The pension plan is terminating and the participant has been offered a lump-sum cash out option. She wishes to elect this option (with spousal consent) and roll the lump sum to an IRA (non-Roth).

Question: What portion of the lump sum is an eligible rollover distribution?
a. All but the full normally computed required minimum distribution?
b. (a) but reduced (not below $0) by the sum of the monthly pension payments received?
c. Other?

Question: Will the amount rolled over be subject to a second minimum required distribution in 2013?

Thank you.

Answer:
The amount that’s eligible for rollover is the full amount minus any required minimum distribution (RMD) of the pension plan for 2013 that she hasn’t taken yet. Assuming she’s age 70 ½ or older this year, she doesn’t have to take a second RMD from the IRA on the pension rollover amount.


- By Joe Cicchinelli and Jared Trexler

1 comments:

For me, using my lump sum cash really enabled me to do more of what I wanted to do with my money right away. Helped me get some great opportunities I may have missed otherwise

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