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403B - Over Age 70 And Still Employed - Can He Withdraw?

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Client is over age 70 1/2 and remains employed at the employer (public school district) through which 403b accounts were funded. I understand that A) this employee may continue to make ongoing salary reduction contributions to the 403b, and B) that RMD's are not required at this time while employment continues (but may be required upon attainment of age 75).

 

But here is the question - the client wants to take in-service distributions. I'm concerned that this is not permisable even though the client is well over age 59 1/2 due to the ongoing employment with the funding employer. The age 59 1/2 triggering (so I've been told) is not sufficient in and of itself to allow permisable distributions. So the question is this - is it permitted for an employee to take IN-SERVICE distributions from 403b at age 70? Also, if the answer is no - where can I find this in an IRS document or PLR?

 

(assume no pre-1987 contributions - and also that the employee has been making salary reduction contributions continuing into the current year)

 

Thank you.

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Hey Pro, I'm curious who told you: "The age 59 1/2 triggering (so I've been told) is not sufficient in and of itself to allow permisable distributions." Page 12 of this IRS document is pretty clear: Publication 571. BTW: the very existence of RMD rules would seem to indicate the IRS would want individuals such as you describe to take withdrawals.

 

Dan Otter

 

[uPDATED] p.s. When I'm referencing RMD it's with full understanding as Joel points out (below):"Required Minimum Distributions are not required if still working past 70.5 They must commence upon subsequent severance from employment, regardless of age." My point is that the government wants distributions to happens sooner rather than later. My question is: Why would the employer take an opposite tack (which I understand they are allowed to do)?

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Dan:

 

There are special rules that relate to 403b and employees still working after age 70. Unlike IRA's foe example employees who have not severed service at age 70 1/2 are not required to take RMD's (providing that the EE is sill working at the employer through which the 403b was funded). There are yet different rules which kick in at age 75. I know that years ago I encountered a situation where a 70+ active employee was instructed that they could not take withdrawls. It's not common to encounter this but it has come up again. So, I'm trying to find someone with specific knowledge of this unique situation.

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I believe the answer can be found in Treasury Regulation section 1.403(b)-6(d)(1)(i). This section says:

 

(d) Distribution of section 403(b) elective deferrals--(1) Limitation on distributions –

 

(i) General rule. Except as provided in §1.403(b)-4(f) (relating to correction of excess deferrals) or §1.403(b)-10(a) (relating to plan termination), distributions of amounts attributable to section 403(b) elective deferrals may not be paid to a participant earlier than the earliest of the date on which the participant has a severance from employment, dies, has a hardship, becomes disabled (within the meaning of section 72(m)(7)), or attains age 59½.

 

(ii) Special rule for pre-1989 section 403(b) elective deferrals. For special rules relating to amounts held as of the close of the taxable year beginning before January 1, 1989 (which does not apply to earnings thereon), see section 1123(e)(3) of the Tax Reform Act of 1986 (100 Stat. 2085, 2475) Public Law 99-514, and section 1011A©(11) of the Technical and Miscellaneous Revenue Act of 1988 (102 Stat. 3342, 3476) Public Law 100-647.

 

(Note that I included subparagraph (ii) since you mentioned pre-1987 contributions.) The general rule says that distributions may not be made "earlier than the earliest" of the dates listed. Thus, it appears that you can make in-service distributions once you attain age 59½, regardless of employment status, absent any plan provisions to the contrary.

 

Hope this helps.

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Guest Joel L Frank

Required Minimum Distributions are not required if still working past 70.5 They must commence upon subsequent severance from employment, regardless of age.

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Joel is correct that required distributions are not required until after severance of employment. If a person works past age 70½, the year in which they sever employment becomes the first distribution year.

 

However, if an employee has an account balance as of December 31, 1986, that balance is required to be distributed at age 75, even if still employed. But this is not relevant in this example, since the original post indicated that we are to assume no pre-1987 contributions.

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Thank you folks for your comments. I am totally clear on RMD's not being required if the 70 year old is still employed. Also I know the rule about pre-87 contributions and age 75.

 

The entire concern here is if the 70 1/2 year old who remains employed is entitled to simply take withdrawls (even while still or recently - within this calender year, making current year contributions). The individual in question wants to take both cash withdrawls for part of the balance AND rollover to IRA another part. Obviously rolling over to IRA kills the RMD waiver.

 

The best I've been able to come up with at this point is a solid "maybe"... and that depends upon language adopted by the employer in their plan. Since the employer never actually needed to have plan language until the changes about 4 years ago - its a crapshoot as to which language they selected and we need to get that information. Without that information - I think that it is unadvisable to take withdrawls. What do you think?

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Guest Joel L Frank

Thank you folks for your comments. I am totally clear on RMD's not being required if the 70 year old is still employed. Also I know the rule about pre-87 contributions and age 75.

 

The entire concern here is if the 70 1/2 year old who remains employed is entitled to simply take withdrawls (even while still or recently - within this calender year, making current year contributions). The individual in question wants to take both cash withdrawls for part of the balance AND rollover to IRA another part. Obviously rolling over to IRA kills the RMD waiver.

 

The best I've been able to come up with at this point is a solid "maybe"... and that depends upon language adopted by the employer in their plan. Since the employer never actually needed to have plan language until the changes about 4 years ago - its a crapshoot as to which language they selected and we need to get that information. Without that information - I think that it is unadvisable to take withdrawls. What do you think?

 

 

Why doesn't he/she stop making contributions? If this doesn't give him/her the disposable income desired then he/she is free, under the Code, to make in-service taxable withdrawals and contribute to the account during the same year. It would be prudent to find out what the Plan Document says. Why is an IRA rollover important to him/her in light of the fact that the open-ended-ness of the 403(b) RMD is removed?

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As I pointed out, the only thing that would prevent the person from making withdrawals is plan language to the contrary. While it is highly doubtful that the plan language chosen regarding in-service withdrawals would be more restrictive than the law allows, there is a possibility that it is. So, as Joel suggests, it would be a good idea to find out for sure what the plan says. There's bound to be someone in the employer's administrative office who can provide an answer.

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Is it also true that if an employee delays 403(b) MRD's because he is still working, and then retires at age 78, he must then take all of the MRD's that he deferred at one time when he starts to receive the MRD's? In other words, when he retires at 78, he will be paid the MRD for age 71, 72, 73, 74, 75, 76, and 77 along with the one for his 78th year?

 

Thanks!

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Olivia:

 

I've never heard anything like that. Rather my understanding is that the RMD gets calculated at the current age and the first RMD is due for the year of seperation from service. It does not matter if seperation is effective January 4th or December 23rd... the first RMD is due for withdrawl by year end.

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