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A relative born in 1951 asked me to figure out if an unusual one-time payment from a pension plan is eligible for a tax-free rollover to her IRA. It’s not a typical “lump sum” payment, but an accumulation of about 100 monthly pension annuity benefits that were withheld / deferred by her request and will be paid when she begins receiving monthly pension benefits.

This relative worked in IT at U.S. office of a major international bank for just a couple of years in the 1990s in the run-up to the Y2K bug, and became fully vested in the bank's traditional pension plan. Then she moved on to other employment. It was not a cash-value plan, but a traditional qualified pension plan that becomes annuitized to a fixed monthly amount when the employee reaches age 65.

When she reached age 65 in 2016, the bank informed her that the monthly benefit would be $630 per month for life, and it gave her the option of deferring the start of payments until payment becomes mandatory at age 70-1/2 (at the time, but now 73). The bank said that if she defers, it would hold her funds and pay them with interest when she chose to begin pension payments. Since she was still working and had adequate income, she chose to defer.

Soon (by the April 1 following the year of her 73rd birthday) it will be mandatory to start accepting monthly payments, so the accumulated value of more than 100 monthly payments (over $63K plus interest) will be paid upon issuance of her first monthly pension check.

She wants to roll over the $63K+ to her IRA, but a low-level, public-facing pension department representative says that she can’t do a rollover “because it’s an annuity”. Yet IRS Pub 590-A (Contributions to IRAs) says, in part (paraphrasing):

You can roll over all or part of any distribution from your retirement plan account except: (a list of irrelevant things or) a distribution that is one of a series of substantially equal payments.

This payment of accumulated benefits is not “one of a series,” it’s the only one of its kind. It’s a one-time-only payment, so based on the plain text of the words in Pub 590-A, it should be eligible for rollover to an IRA, in my opinion.

I asked a CPA friend about this, and he kind of waffled. He said he could see the logic of my argument but cautioned that one could also take the position that the accumulated / deferred monthly payments were each individually not eligible for rollover (agreed!) so why would they become eligible by lumping them all together? (Uh, because taken together makes them no longer “ONE of a series of substantially equal payments”?)

I can’t fault the CPA for waffling, as I’m sure he has seen more than his fair share of insane interpretations of tax law by IRS examiners.

So I am appealing to the wisdom of this Stack. Is this accumulation of about 100 withheld / deferred monthly payments, all to be paid in one check, eligible for tax-free rollover to an IRA? A citation to law, regulation or an IRS ruling would be appreciated, but opinions supported by experience would be useful too.

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his payment of accumulated benefits is not “one of a series,” it’s the only one of its kind.

No, it's not. The "one of its kind" is a method of payment chosen by her, but the accumulation of the amount is based on a "one of a series". You can't re-characterize payments by voluntarily asking the bank to hold the checks for you for a while.

In this case the burden of proof would be on her, the IRS will hold the position as I described: she chose to defer them, and cannot force the government to treat the money more favorably just because of her choice.

This is similar to the step transaction doctrine, substance over form doctrine, and other similar policies where the IRS looks at the overall context and not just a single transaction at hand.

If she wants to be certain about the expected treatment by the IRS, she can request a private letter ruling. There she'd describe the facts of her situation and would ask the IRS to determine how they interpret the law with regards to that situation.

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  • Points certainly worthy of consideration, but nothing is being re-characterized. Deferral is an allowed, acceptable choice under the plan document. Rolling over deferred amounts would be no different from rolling over a percentage of a cash-value plan and annuitizing the rest, which is allowed under some pension plans. Not sure how a rollover of withheld benefits makes it a more favorable tax treatment except that it's spread out in time -- a commonplace tactic. It's all 100% taxable either way, via RMDs or as ordinary annuity income. Comment? How is this different?
    – MTA
    Feb 29 at 21:11
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    @MTA Rolling over deferred amounts would be no different from rolling over a percentage of a cash-value plan and annuitizing the rest - you cannot roll over an already annuitized annuity though, which is the case here. How is this different? - by allowing the rollover the lump sum would instead be taxed at potentially lower rate as RMDs. The condition of the original deferral was that you defer the current tax in exchange for a single taxable event, and you're trying now to circumvent that condition, basically double dipping.
    – littleadv
    Feb 29 at 21:15
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    Before you write more comments - remember that it's not me you need to convince, it's the IRS or the US Tax Court. So if you're trying to validate your thinking, don't crowdsource it on the internet, talk to a licensed specialist. You'd probably want to look for a tax attorney who deals with pensions specifically, not a generic tax adviser/CPA who'd need to either research to provide a written advice, or verbally tell you what you've already heard.
    – littleadv
    Feb 29 at 21:19
  • Well said, thanks for clarifying.
    – MTA
    Feb 29 at 21:20

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