Eligible Rollover Distributions (ERDs)

So, what funds can be rolled over from your qualified retirement plan (not an IRA) into another retirement plan or IRA?  Interestingly, the IRS doesn’t specifically tell you what can be rolled over – but rather, what cannot be rolled over. So the definition of eligible rollover distributions includes any monies from a qualified account that are not specifically disallowed.

Let’s look at the definition from the IRS…

Definition of Eligible Rollover Distributions

Only Eligible Rollover Distributions, or ERDs, can be rolled over, according to the IRS.  The definition that is given is really an anti-definition, explaining that any normally taxable distribution is eligible for rollover unless it fits the exceptions listed.

An ERD is defined as – a distribution that is eligible to be rolled over to an eligible retirement plan. Eligible rollover distributions include a participant’s balance in a qualified plan, 401k, 403b or 457 plan, except for certain amounts that include the following:

• Any of a series of substantially equal periodic payments (SOSEPP) paid at least once a year over:
  • The participant’s  lifetime or life expectancy,
  • The joint lives or life expectancies of the participant and his/her beneficiary, or
  • A period of 10 years or more
• A required minimum distribution
• Hardship distributions
• Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains
• A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant’s accrued benefits are reduced (offset) to repay the loan
• Dividends on employer securities
• The cost of life insurance coverage

So, as long as the distribution that you take from a 401k, 403b or 457 plan doesn’t fit any of the requirements above and has a payout period of 10 years or less, your distributions can be considered ERDs, and therefore rolled over into an IRA or other retirement plan.

Understand that these distributions will be subject to mandatory 20% withholding if paid out to you, and not transferred directly to the new plan or IRA.  Plus, you must complete the rollover within 60 days when it’s not done by trustee-to-trustee (or direct) rollover.

Whenever possible, you would want to set up a rollover as a direct rollover into your IRA (or other QRP) to avoid this withholding requirement and 60-day limit.  If this can’t be done, you should make up the 20% withheld difference from other savings as you rollover the distributions in order to avoid tax and penalties. Otherwise you’ll get a tax bill for the portion that was withheld and not properly rolled over – see The Heartbreak of Withholding From Indirect Rollover for more details on the 20% withholding.