401(k) Transfer Error

Submitted by Jerry Logan on Sat, 2008-07-26 19:50

Transferred a 401(k) balance to inherited IRA for a non-spouse beneficiary without first deducting the RMD. What are the consequences and remedy(if any)?



Submitted by Alan Spross on Sat, 2008-07-26 21:08

The RMD is deemed distributed, but then rolled over to the IRA as an excess contribution. The remedy is the same as correcting an excess regular contribution to the IRA, ie. taking a distribution plus allocated earnings for the time the transfer resided in the IRA. The IRA custodian should be told that they are correcting an excess contribution so they will know to do an earnings calculation.



Submitted by Al Fry on Sun, 2008-07-27 02:46

How old was the owner and when did he/she retire?



Submitted by Jerry Logan on Sun, 2008-07-27 05:59

Owner was 76 at DOD 2/2007. Had been taking RMDs for several years. Beneficiary took 2007 RMD but transferred 401(k) balance to inherited IRA in 2008 without taking 2008 RMD first.

So my understanding now is that the beneficiary has until April 15, 2009 to take the RMD amount plus allocated earnings for that amount. If this happens all will be well and no 6% penalty. Am I correct?



Submitted by fairira on Sun, 2008-07-27 16:59

Do the foregoing remarks apply as well to the transfer of a deceased’s IRA into the beneficary’s inherited IRA? I.e., must the year’s RMD be taken before that transfer to avoid an “excess contribution” to the inherited IRA?

Thank you.



Submitted by Alan Spross on Sun, 2008-07-27 17:54

jerlog,

Beneficiary has until 4/15/09 only if he fails to file or extend. In the usual case where he files or extends on a timely basis, he has until the extended due date of 10/15/09 to correct and avoid the 6% excise tax for 2008. However, since earnings must also be distributed, there is no sense in waiting and/or possibly having to amend his 2008 return to include the earnings.

fairira,
No, the above does not apply to inherited IRAs because IRA RMDs can be aggregated, ie that RMD can be taken from any of multiple accounts. This holds true for inherited IRAs also, which can be aggregated if inherited from the same decedent. The following is copied from the summary of the 2002 IRS RMD ruling:
>>>>>>>>>>>>>>>
In addition to retaining the
special rules for IRAs provided in the
2001 proposed regulations, these final
regulations provide a special rule for
trustee-to-trustee transfers between IRAs
to coordinate with the rule that allows
aggregation of IRA distributions.
Although the IRA to IRA transfer is not
treated as a distribution for purposes of
section 401(a)(9), in light of the fact that
the required minimum distribution with
respect to the transferor IRA can be
taken from any IRA, the transferor IRA
will be able to transfer the entire
balance and will not be required to
retain the amount of the required
minimum distribution for the year.
>>>>>>> >>>>>>>>>>

Therefore, the inherited IRA could be directly transferred to a new custodian or account and the RMD could simply be taken from the new accounts without any corrective distribution or earnings calculation.



Submitted by Jerry Logan on Sun, 2008-07-27 23:13

Yeow! Just learned that the beneficiary already had an inherited IRA from the same deceased and transferred the 401(k) distribution into the existing inherited IRA. Existing inherited IRA was properly titled but the 401(k) transfer was added to the existing inherited IRA instead of creating an additional inherited IRA for the 401(k) assets.

Are there any consequences of which I should be aware?



Submitted by Alan Spross on Mon, 2008-07-28 00:32

No, this is not a problem unless there is a situation where the future RMDs are not figured using the same factors. This is rare, but it can occur. For example, if the original inherited IRA was using the 5 year rule, or a life expectancy RMD based on a different beneficiary this would be a problem.

The earnings calculation will be somewhat different when the excess contribution is corrected because it reflects the earnings experience of the entire account while the excess contribution was in the account. This is no different than how a routine excess contribution earnings calculation is done.



Submitted by Jerry Logan on Mon, 2008-07-28 06:11

Thanks Alan for all the help. Just want to be sure there’s no problem with this even though the inherited IRA and 401(k) are going to a non-spouse beneficiary.



Submitted by fairira on Mon, 2008-07-28 16:31

To alan-oniras,

Thank you for your reply that the RMD does not have to be taken from the deceased’s IRA before its transfer to the inherited beneficiary IRA because IRA RMDs can be aggregated–i.e., “that RMD can be taken from any of multiple accounts.”

Re your excerpt from the summary of the 2002 IRS RMD ruling, I am surprised it seemingly might apply when the IRA’s are of 2 or more different categories–e.g., I don’t think that the RMD’s from an inherited traditional IRA and inherited Roth IRA can be aggegated. Aren’t the deceased’s TIRA and the subsequent inherited TIRA in different categories for RMD purposes?

While I certainly respect you for your knowledge and can accept what you said, I would have thought that the RMD must come from the deceased’s IRA before its transfer and transformation to the different category of inherited IRA. In turn it seemed to me that one cannot aggregate these 2 types of IRA’s as in effect one big IRA for RMD purposes.

I would appreciate your further comments.



Submitted by Alan Spross on Tue, 2008-07-29 00:11

You are correct that aggregation cannot occur between inherited IRAs and owned IRAs (except for spousal inherited IRAs that default to owned IRAs if the RMD is not taken).

However, once the IRA owner is deceased, that IRA BECOMES an inherited IRA, and is considered an inherited IRA of the beneficiary whether separate accounts are created or not. Accordingly, the RMD is not being aggregated between owned IRAs and an inherited IRA.

Quite frequently an IRA owner subject to RMDs passed prior to taking the RMD for the year of death. That RMD should be taken prior to the end of the year of death, but it does not matter whether it is taken prior to setting up separate accounts or after.



Submitted by fairira on Tue, 2008-07-29 18:52

Alan,

Thank you very much for your explanation, clarifying this for me–and maybe others.



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