Q.: I am 69 years old and do not plan to retire until I am in my late 70s. I have $250,000 in my New York City Employee IRA and $600,000 in my 457(b) account. As you know IRAs are subject to annual Required Minimum Distributions (RMDs) beginning at age 70.5, even for those of us that are still working. I do not need these mandatory withdrawals because I will have my paycheck. It is wrong to compel people like me into a higher tax bracket while still employed. Is there a way of postponing these mandatory withdrawals until such time as I stop working? P.J.

A.: I do agree, and you can postpone these RMDs. Using the direct rollover option, transfer, prior to attaining age 70.5, your NYCE IRA balance to a special 401(k) Rollover Account maintained by the Deferred Compensation 401(k) Plan of the City of New York. The 401(k) Plan allows people in your situation to defer the taking of RMDs until the year they retire. For you this will be in about 10 years. Do you have other IRAs? Now is an excellent time to transfer them to the special 401(k) rollover account.

The 60-Day IRA Rollover Rule: An IRA owner has the unbridled right to withdraw money from an IRA and use it for any legitimate purpose so long as the withdrawal is returned to the IRA within 60 days.

Jimmy has a $100,000 balance in his NYCE IRA. He wants to withdraw half and invest the $50,000 in a stock that his father-in-law has invested in. He hopes to make a short-term killing on this outside investment and before the 60-day window closes, redeposit the $50,000 in his IRA with no questions asked.

Good or bad? If this speculation works out it will be a good deal but what if the stock stumbles and is worth just $40,000 with the 60-day window closing fast? Jimmy wants to wait it out because his father-in-law is a great believer in this company. Jimmy does not have another $50,000 that he can deposit in the IRA, so he does nothing and must pay income tax on the $50,000 withdrawal plus a 10-percent Federal excise tax because he is younger than 59.5.

Let’s assume the income tax due is $10,000 and the Federal excise tax due is $5,000. Does Jimmy have the $15,000? Maybe Jimmy can borrow the $15,000 from his investment adviser, his father-in-law. Get the picture?

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by phone at (732) 536-9472, or via email at rollover@optonline.net.

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(2) comments

Jason Lampert

The IRA rollover as 60 day loan example is even worse than you say. The IRA custodian is required to withhold 20% of the distribution by the IRS at the time of the distribution. So if Jimmy requests $50,000, the custodian sends $10,000 to the IRS and Jimmy only gets $40,000 to invest. In order to not have any income tax liability he will need to return the whole $50,000 at 60 days to the IRA, even though he only got 40k in cash. He will get a refund of the withholdings at tax time if he puts the whole 50k back, but will be subject to tax and penalties(if younger than 59.5) any difference between the (amt distributed+amt withheld) and the amt. rolled over. This transaction is fraught with difficulty, and MANY people get themselves in trouble with it.


Jason Lampert:

Please be advised that the mandatory 20 percent withholding tax does not apply to IRA distributions.

With that said, the custodian of an employer plan must withhold 20 percent of a distribution that is eligible for rollover treatment when the plan participant does not elect the Direct Rollover option. Example: Jason is a member of the 457(b) plan of the City of New York and wants to take out $50,000. The $50,000 is eligible for rollover treatment but Jason does not elect the Direct Rollover option. He wants to receive the check. The 457(b) plan must withhold 20 percent for income tax. There is no problem because Jason has no intention of effectuating a rollover of the $50,000.

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