Qualified Pension rollover to Roth IRA

[larrybuton830]

My income is strictly from SSA and from my State's retirement system. There is no earned income. No W2 forms. I am using TurboTax Premier 2020. The questions asked when entering my 1099-R information concerning my retirement pension from the state makes me think that I could do a rollover of some or all of those funds into my Roth IRA. I know that this would be a taxable event. I am happy to pay the taxes on any funds now that I could rollover into my Roth IRA because if I get lucky and make big on the right investments, my returns on those investments would be non-taxable. I would like to do a rollover of part of my monthly state pension proceeds. From what I could gather, seeing that this would be a taxable event, I would not be held to the 60 day timeframe for rolling over funds received. Also, multiple rollovers could be made. I would not be held to just one a year.  I could possibly rollover funds monthly? Am I understanding this correctly or am I missing something? Also, could you point me directly to the section and page of the 590-A and or 590-B instructions that support or deny this approach? I keep finding contradictions and am getting confused.

[hbl3973]

larrybutton830,

There are a few caveats to what you propose to do.  Firstly, RMD distributions cannot be rolled over into a qualified retirement account such as an IRA.  Any withdrawal above that amount can be rolled over to a Roth IRA if you so choose.  You might also want to review publication 575 in addition to 590-A.  The 60 day window for each distribution from your qualified retirement plan still holds.  (590-A page 44) Trustee-to-trustee direct rollovers don't involve tax withholding that you would have to replace from other funds and there is no 60 day window.  Whether your state pension folks would be amenable to monthly direct rollovers is a question you should ask them.

[larrybuton830]

The distribution from my pension is not an RMD as in when you receive required distributions from an annuity or IRA once you hit 72. I am still in my 60s. I had checked with the state pension people and they said they could do a direct rollover of the funds but they would have to do the entire amount. they can not split the payment. Under Rollover methods on page 44 of 590-A under Rollover they talk of "plan loan offset" and also to see "Time Limit for Making a Contribution." in chapter 1 (page 21). I do not think the Plan loan offset section applies due to the nature of the state's pension plan. The last paragraph "Rollovers completed after the 60-day period just informs you that the rollover would be taxable. Not a problem. I am not looking to make a non-taxable contribution. Everything except one section leads me to believe I  can do what I asked in my original post. On page 24 of publication 590-A in the "Rollover From Employer's Plan Into an IRA" section. The "Eligible rollover distribution" heading of that section lists exceptions to distributions that qualify for rollover. Number three in that list of exceptions state; "Any of a series of substantially equal periodic distributions paid at least once a year over:

 a. Your lifetime or life expectancy, 

b. The lifetimes or life expectancies of you and your beneficiary, or

c. A period of 10 years or more."

The phrase "series of substantially equal periodic distributions" makes me wonder why the state says they can do a direct rollover of my monthly check into my Roth IRA? Their payments to me are monthly payments that are equal in size except when each July the monthly amount is changed for a Cost of Living adjustment.

I believe our state's pension plan is a "defined benefit plan" and as such, I should be able to do the rollover according to Table 1-4 on page 22. Qualified Plan to Roth IRA.

Contradiction to the exceptions listed on page 24. Still confused.

[SusanY1 · Accepted solution]

Even when a rollover is taxable, the 60 day window still applies.  What happens after the 60 days is that the funds cannot be deposited into an IRA (Roth or Traditional) and any contributions made after the window of time expires would be taxable and would be required to be removed from the account or subject to a penalty for excess contributions. This penalty is 6% of the excess amount for each year that the funds remain in the account. 

Taxpayers are also limited to one rollover per year.

Periodic rollover deposits aren't possible.  Periodic trustee to trustee transfers may be. These are sometimes seen taken from annuities that have restrictions on when funds can be accessed - but as you noted in your research regular, periodic payments (such as those from a typical pension plan received after retirement) are not eligible to be rolled over.

It is possible for funds to be deposited into a variety of accounts, including other IRA accounts, but that doesn't mean that the deposits are allowable under tax rules.   An employer might make deposits into an IRA account if a retiree directs them to do so, but they would almost certainly be considered contributions to the account, not rollovers.  To make the contributions supporting earned income is required.  

The simple act of a bank or other financial institution accepting funds doesn't mean that the transaction is allowed under tax regulations.  The financial institutions do not have the necessary information to determine when they are or are not, so they accept them and leave it to the taxpayer to sort out later.   Unfortunately, mistakes surrounding rollovers by banks and other financial institutions are quite common.