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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Florida is representative of a common question of whether property may be rolled over from a qualified plan to an IRA.
The advisor’s client has a real estate investment held within a 401(k) plan. The client is retiring and wants to move the real estate into his IRA. The advisor is unsure whether real estate can be rolled over from a qualified plan to an IRA.
Theoretically, assets within qualified plans, including real estate, may be rolled over in kind into an IRA pursuant to Treasury Regulation Section (Treas. Reg.) §1.402(c)-2(b)(4). Realistically, such a transaction may be difficult to facilitate. Because this is an intricate tax matter, it is advisable to seek the guidance of a tax and/or legal professional for specific situations.
Let’s explore how the in-kind rollover process generally works. First, the qualified plan language would need to permit in-kind distributions of property. If in-kind distributions are not permitted, the plan language would need to be amended to permit in-kind distributions.
Next, the client would need to establish a trusteed IRA with a trustee willing to hold real estate within the IRA, which may be challenging to find. Assuming a trusteed IRA is set up, the ownership of the real estate would be changed from the name of the plan trust to the name of the IRA trustee on behalf of the IRA. Then the participant would request a direct rollover from the plan, and the recordkeeper (or TPA) would process the request and issue a Form 1099-R, noting the value of the property at the time of transfer along with reason code G for a direct rollover. Substantiation of the fair market value (FMV) of the property is critical.
The IRA trustee would report the direct rollover on Form 5498, noting the value of the property in Box 2. Annual FMV updates would be required using Form 5498.
A key concern with any real estate transaction is the property valuation. The value must reflect the actual FMV of the property, which likely will necessitate an independent appraisal. For retirement plan distributions of property other than cash, the value reported on Form 1099-R must be the property’s FMV on the date of distribution. FMV is defined as:
The price at which the property would change hands between a willing buyer and a willing seller, neither being under compulsion and both having reasonable knowledge of relevant facts.
United States v. Cartwright, 411 US 546
Conclusion
While, potentially, real estate held in a qualified retirement plan could be rolled over to an IRA, there may be several logistical hurdles that could make the transaction difficult to accomplish.