11 Aug Can I shield IRA income from the Senior Freeze?

Q. Required Minimum Distributions (RMDs) are causing our yearly income to rise, therefore possibly putting us out of reach of the Senior Freeze benefit. The state says rollovers are not considered income, so if we roll over an RMD from an IRA to a taxable joint account, does it have to be reported as income for the Senior Freeze?
— Trying to qualify

A. Nice try, but nope.

An RMD is never considered a rollover.

If you were permitted to roll over the RMD, you could put off the payment of tax on the distributions forever, and that’s not permitted by the IRS.

Indeed, the government wants to get its tax dollars.

The concept of a rollover is when one moves funds from one retirement account to another, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Eatontown.

“The Internal Revenue Code allows a taxpayer to receive a distribution that is not a RMD and roll it over into another retirement account within 60 days to avoid the distribution from being taxable,” Becourtney said, noting that New Jersey follows the same rules.

He said the 60-day period can straddle two tax years. For example, one can take a distribution on Dec. 10 of a given year and roll it over on Jan. 29 of the following year. The rollover occurred within 60 days, thus the distribution is nontaxable, he said.

So effectively, via a timely rollover, one can take a short-term loan of up to 60 days from a retirement account with no tax repercussions other than possibly generating some taxable investment income during the up to 60-day period that the funds are not sitting in the retirement account, Becourtney said.

It’s common with an actual rollover that an individual will transfer funds from one retirement account directly to another retirement account, never taking possession of the funds.

“For example, you obtain a new job and have a balance built up on the 401(k) plan at your current job,” Becourtney said. “You direct your current employer to transfer your plan balance to your IRA. This is often referred to as a `trustee-to-trustee’ transfer.”

The transaction will generate a Form 1099-R with a code G entered in Box 7, indicating this event. As you never took possession of the funds, the distribution is automatically recognized as a tax-free rollover, he said. You must report the gross distribution on your federal income tax return with a corresponding entry of zero taxable income.

“The instruction that you refer to pertaining to the New Jersey Senior Freeze Program addresses rollovers from one `financial instrument’ to another ‘financial instrument,'” Becourtney said. “A transfer from your IRA to a non-retirement account will not meet this definition, thus the IRA distribution will count as income, possibly putting you over the limit as far as qualifying for the freeze on your real estate taxes.”

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This post was first published in August 2017.