Subject: Roth IRAs - P.L. 110-458 - "Worker, Retiree, and Employer Recovery Act of 2008"
There has been some confusion regarding the eligibility for the new Roth IRAs as a result of the legislation in the title of this article, above, (P.L. 110-458 - "Worker, Retiree, and Employer Recovery Act of 2008", Formerly known as H.R. 7327.) This legislation created the opportunity for Roth IRAs for “airline settlement amounts” received in bankruptcy settlements for airline workers whose pension plans were terminated after 9/11/01. This article is a follow-up and update to our 12/18/08 email (that went to clients only) on this same subject, sent out before the Act was actually signed into law by President Bush on 12/23/08.
The Bill covers two items of particular interest to retired Delta pilots: First, in Section 125 of the Bill, it permits the “ROLLOVER OF AMOUNTS RECEIVED IN AIRLINE CARRIER BANKRUPTCIES TO ROTH IRAs.” Secondly, it waives, for those already over 70 ½, the RMD (Required Minimum Distribution) from your IRA Accounts – For 2009 ONLY.
For those who were retired at the time of the Bankruptcy, the Special Provision for airline employees to roll over their Bankruptcy Settlement amounts into a Roth includes all three categories of payments received by retired Delta pilots as Bankruptcy Settlement amounts: The Admin Claim, the rest of the NQ Plan Settlement (the “Balance Claim”), and the Medical Claim. For active Delta pilots (at the time of the BK) the amounts able to be rolled over include both the "Claim" and the "Note" amounts for those pilots who received same.
Applicability: Any airline worker whose defined benefit pension plan was terminated or frozen as a result of bankruptcy (filed after September 11, 2001, and prior to January 1, 2007) is allowed to roll-over bankruptcy payments intended to replace lost retirement income to a Roth individual retirement account (“Roth IRA”)
Amounts and Timing: The settlement amounts that can be rolled to the Roth are ONLY the TAXABLE amounts received in the Bankruptcy Settlement. This is quite nicely detailed in this month’s issue of Air Line Pilot magazine (February 2009.) There is an article on pages 14-16 entitled “ALPA Opens a New Window of Opportunity.”
Here are some highlights - (Bold underlining is ours):
- “Keep in mind … the legislation covers only those amounts that these pilots received directly in the form of taxable income during the bankruptcies following 9/11.”
(NOTE: In some forums, there has been speculation about one’s normal “Lump Sum” from the DPRP being eligible to be rolled into the Roth – this is an incorrect interpretation. This legislation does not apply to one’s normal “Lump Sum” from the DPRP. (Jim confirmed this in a conversation with Liz Koby, ALPA ERISA Attorney, on Wednesday.) Note that funds from a Traditional IRA can, under certain circumstances, be withdrawn, taxed, and reinvested in a Roth IRA, but that is another subject entirely, and one that should be thoroughly discussed with your Tax Adviser.)
- “You may have already spent the amount you received during the bankruptcy, and that’s okay; there is no requirement that you roll over those exact funds. The rollover is restricted only to the amount you received. Therefore, you could roll over other funds, including monies that you borrow or receive as a gift.” (Note 1: The amount eligible is the GROSS amount, including the amount that was withheld for taxes.) Note 2: Normal Roth income and contribution limits are waived.
- “If you want to take advantage of this rollover opportunity, your deadline is Sunday, June 21, 2009, for payments you received before December 23, 2008.” (Note: So what that REALLY means is that your deadline is Friday, June 19th!)
- “If employees receive additional bankruptcy proceeds after December 23, 2008, the 180-day … time period(s) will be measured from the date the employee receives such proceeds.”
Delta has 90 days per the legislation from 12/23/08 to provide each retiree and employee with an accounting of those amounts eligible to be rolled over into their Roth. (NOTE: You should already have this information in the form of a detailed Spreadsheet from Delta, accompanying the February 11, 2007 letter from Rob Kight.) If you are a pre-2007 Delta retiree with no other W-2 Wages from Delta in 2007, your 2007 Delta W-2 should be an additional source of the eligible amounts.
Mechanics: Most providers and their custodians will probably require something similar to what we require at Retirement Advisors of America to open and fund your Roth IRA Account. For us to take your funds and put them into the new Roth option for Airline Employees, we need the following:
1. Original signed Roth IRA paperwork (A Roth IRA must be separate from any other type of IRA.)
2. A copy of your 2007 spreadsheet from Delta and/or the forthcoming Delta Letter showing the amount of settlement dollars received. Some custodians prefer one over the other.
3. A Letter of Instruction requesting your check be deposited as a Roth rollover contribution, (or if requested by existing clients, they can have currently invested, non-IRA assets transferred or journaled to their new Roth account.) (Note: The letter of instruction should state that the assets are eligible for a Roth. Retirement Advisors of America has sample letters of instruction and can provide those to you.)
Roth IRA Advantages/Information: First of all, understand that we are not income tax advisers or experts. Consult your own personal tax adviser! Having said that, the advantage of the Roth IRA is that, if the funds are left in the Roth for 5 years, ALL DISTRIBUTIONS from that account are TAX FREE not just Tax-Deferred, as in a normal Traditional IRA. Further, the rules for distributions from a Roth are much more favorable in that you have no Required Minimum Distributions, ever, during your lifetime. (Note: There is a Five-Year requirement for withdrawals of any gains to be taken out tax free, as well as “an age 59 ½ Rule,” with exceptions. The contributions are not subject to the five year requirement) You can search the internet for more information on Roth IRA’s, and again, please consult your tax adviser. Just below is a short blurb on Roth IRAs from a Motley Fool article, as well as a link to the full article at: http://www.fool.com/personal-finance/retirement/2008/10/28/a-tax-savvy-way-to-profit-from-the-panic.aspx .
“The Roth IRA, on the other hand, takes taxes out of the equation entirely. Unlike traditional IRAs and 401(k) plans, you don't get any sort of upfront tax break for making contributions to a Roth IRA -- you have to use after-tax money. But, in return for giving up that tax deduction, you never have to pay income tax on the income from your Roth investments, even when you take the money out during retirement."
The obvious downside for Delta and other airline Retirees is that in order to Fund the Roth IRA available under this legislation, you have to get the money from somewhere! It would not likely make good tax planning sense to pull money from a Tax-deferred account (401K or IRA) to fund this Roth IRA, since the former action would most likely have significant negative current income tax consequences. Thus this appears to be a rather "minor victory" in general, applicable to just the minority of airline retirees with sufficient assets currently invested in taxable accounts to feel that they can take advantage of this bill. (Note that this Roth IRA opportunity should be of potentially SIGNIFICANT value to ACTIVE Delta pilots.)
Finally, at least one money manager out there has suggested in an email to Delta pilots that they have a “way around” converting Traditional IRA assets to a Roth IRA without paying taxes, and then taking immediate tax free withdrawals. Our research has turned up no such legal and feasible manner to do this, and no such action has been approved by the IRS to the best of our knowledge. Please stay vigilant, and be wary of “too good to be true” promises!
Added below, is the full text of Section 125. Please feel free to contact either of us, or your Relationship Manager at Retirement Advisors of America for any further information.
Regards,
Jim George, Pilot Representative
866-767-5757
Buck Stevens, Pilot Representative
866-825-8456
SEC. 125. ROLLOVER OF AMOUNTS RECEIVED IN AIRLINE CARRIER BANKRUPTCY TO ROTH IRAS.
(b) Definitions and Special Rules- For purposes of this section--
(1) AIRLINE PAYMENT AMOUNT-
(A) IN GENERAL- The term ‘airline payment amount’ means any payment of any money or other property which is payable by a commercial passenger airline carrier to a qualified airline employee--
(i) under the approval of an order of a Federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and
(ii) in respect of the qualified airline employee’s interest in a bankruptcy claim against the carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount.
The amount of such payment shall be determined without regard to any requirement to deduct and withhold tax from such payment under sections 3102(a) and 3402(a).
(B) EXCEPTION- An airline payment amount shall not include any amount payable on the basis of the carrier’s future earnings or profits.
(2) QUALIFIED AIRLINE EMPLOYEE- The term ‘qualified airline employee’ means an employee or former employee of a commercial passenger airline carrier who was a participant in a defined benefit plan maintained by the carrier which--
(A) is a plan described in section 401(a) of the Internal Revenue Code of 1986 which includes a trust exempt from tax under section 501(a) of such Code, and
(B) was terminated or became subject to the restrictions contained in paragraphs (2) and (3) of section 402(b) of the Pension Protection Act of 2006.
(3) REPORTING REQUIREMENTS- If a commercial passenger airline carrier pays 1 or more airline payment amounts, the carrier shall, within 90 days of such payment (or, if later, within 90 days of the date of the enactment of this Act), report--
(A) to the Secretary of the Treasury, the names of the qualified airline employees to whom such amounts were paid, and
(B) to the Secretary and to such employees, the years and the amounts of the payments.
Such reports shall be in such form, and contain such additional information, as the Secretary may prescribe.
(c) Effective Date- This section shall apply to transfers made after the date of the enactment of this Act with respect to airline payment amounts paid before, on, or after such date.
