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justin

Contribution Age Question

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I have a client that has a 403(b) plan.

 

He is retiring effective December 31, 2003. He is to receive one last payment of $170,000 in January of 2004. He also turns 70 1/2 in 2003.

 

1) I think he can put off the required minimum distributions until his retirement, instead of the 70 1/2 rule under 401(a)(9). Can he put them off until 2005 because he's receiving a payment in 2004?

 

2) When is he considered "retired", and can he make contributions in 2004?

 

Thanks for your help.

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Guest Chuck Yanikoski

You have a non-standard situation here, so it's hard to give a definite answer. There is always room to argue one way or the other, and you might persuade the IRS or a tax court that your interpretation is reasonable. However, it's not generally considered wise to proceed on the basis of a plausible argument, it really out to be a winnable one. Both of your issues are dubious, though you may be OK on the second one.

 

You probably will NOT be able to argue successfully that a person is not retired just because a final payment is still outstanding. If the client is no longer working at his job, the IRS is very likely to consider him to be retired, and therefore he would be taking a big chance, in my opinion, by postponing required minimum distributions. The fact that you stated on a public bulletin board that your client "is retiring effective December 31, 2003" is going to impair any argument that he is actually retiring in 2004 -- though I don't think you would win the argument anyway.

 

Regarding your second question: Employee contributions to 403(b) plans can be made ONLY by salary deferral. If there is no salary, there can be no employee contributions. It is arguable that a contribution can be made from the final payment, if it is being paid as salary (i.e., with payroll taxes and retirement plan contributions applied to it). It is also reasonably well stablished that if the $170,000 is some kind of retirement bonus, and if it is being paid "as soon as administratively possible" after retirement (i.e., in a matter of days or maybe a week or two into the new year) it will be considered compensation from which 403(b) contributions can be made. If payment is delayed, then it is considered to be deferred compensation, and salary deferrals cannot be taken from the delayed payment(s).

 

 

 

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