section 1 - The American College Online Learning Center

d. Roth Accounts in 401(k)/403(b)/government sponsored 457(b) are rolled to a RothIRA (not into a regular IRA).12. Qualified plans (403(b) plans and government sponsored 457(b)) have some technicalrequirementsa. Eligible rollover amounts include all distributions except:(1) Required minimum distributions(2) 401(k) hardship withdrawals(3) Life annuities and periodic payments for 10 years or more (e.g., termcertain annuities)b. Rules for rollovers(1) Payment directly to the participant(2) Subject to 20% mandatory withholding. So the participant gets only 80% ofthe benefit.(3) Rolling over 100% of the benefit would require contributing additional cash.(4) Rollovers must occur within 60 days of the distribution or all of thedistribution will be subject to taxes.c. Rules for direct rollovers(1) All participants must receive the opportunity for a direct rollover.(2) A direct rollover is a payment from the plan to custodian of an IRA or thetrustee of another qualified plan.(3) A direct rollover election avoids the 20% withholding requirement.(4) Planning Point: A direct rollover is clearly the better option for an individualwanting to roll over the benefit.13. Why roll over plan distributions?a. Participant wants control over the timing and amount of withdrawals.b. Participant wants control over investment options.c. Participant wants an annuity option that is not available in the plan.d. Participant wants to defer the decision to annuitize.14. Why not roll over plan distributions?a. If the best distribution option for a client is an annuity, and the “best deal” (largestannuity payment) is inside the plan.b. Rolling employer stock into an IRA means losing the opportunity to take advantageof the net unrealized appreciation (NUA) favorable tax treatment.c. Rolling after-tax contributions over to an IRA results in a less favorable costrecovery method.(1) Example: Client does a direct rollover of a $100,000 401(k) benefit intoan IRA that includes $10,000 of after-tax contributions. If the next day theclient withdrew $10,000 from the IRA, only $1,000 would be tax free asyou use a pro rata recovery rule. If the client only rolled over $90,000, the$10,000 would be recovered tax-free.15. Checklist of considerationsa. Does the client understand the information provided and the impact of theirchoices?4.5