RMD Transfer from 403b to IRA
Individual age 72 taking monthly RMD’s from his 403b mutual fund transfers his shares to an IRA in the same fund. Fund considers this a rollover and liquidates shares to satisfy this year’s remaining 4 months of RMD’s. They are simply following the general rule that RMD’s can never be rolled over. But does this rule apply when it’s the same individual, the same mutual fund, and there’s a monthly systematic withdrawal plan already in place? Shouldn’t the fund company simply have carried over the monthly RMD’s from the 403b to the IRA?
Permalink Submitted by Al Fry on Wed, 2008-09-24 16:08
Since RMDs cannot be rolled over, I don’t they they had a choice.
Permalink Submitted by Alan Spross on Wed, 2008-09-24 19:24
Al is correct. A direct rollover of an employer plan is considered a distribution and rollover and reported that way on Form 1040. That is how the term “direct rollover” was adopted because it reflects the common elements of a transfer and those of a rollover.
Since this is a distribution and rollover, and the RMD is not an eligible rollover distribution, it must be held by the 403b for later distribution or distributed to the employee concurrently.
Once the other funds reach the IRA, the RMD can be suspended if desired because IRAs can be aggregated with respect to determining which one will produce the RMD and at what time of the year. In fact, since the 403b funds were not part of the IRA year end 2007 balance, the direct rollover will not effect the IRA RMD. The RMD requirement for the 403b year end 2007 balance will already have been satisfied by a combination of the pre transfer distributions and the amount withheld from the IRA direct rollover.
Permalink Submitted by Sidney Poretsky on Wed, 2008-09-24 20:24
Thank you for your reply. It seems to me there ought to be an exception in a case like this. Since it’s exactly the same amount of money, what’s the difference where it comes from – the 403b or the IRA?
Permalink Submitted by Alan Spross on Wed, 2008-09-24 21:08
For one thing, IRA custodians are responsible for reporting the year end balance to the IRS and taxpayer used to determine the RMD, employer plans are not. The IRS produced Regulations exempting employer plans from making these reports on Form 5498, and in return were ordered to determine and withhold RMDs from any transfer. Any particular IRA custodian has no idea what the prior balance was in an employer plan.
The following IRS Regulation addresses this requirement, copied from 1.401a(9)(7):
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Q–3. In the case of a transfer of an amount of an employee’s benefit from one plan (transferor plan) to another plan (transferee plan), are there any special rules for satisfying section 401(a)(9) or determining the employee’s benefit under the transferor plan?
A–3. (a) In the case of a transfer of an amount of an employee’s benefit from one plan (transferor plan) to another (transferee plan), the transfer is not treated as a distribution by the transferor plan for purposes of section 401(a)(9). Instead, the benefit of the employee under the transferor plan is decreased by the amount transferred. However, if any portion of an employee’s benefit is transferred in a distribution calendar year with respect to that employee, in order to satisfy section 401(a)(9), the transferor plan must determine the amount of the required minimum distribution with respect to that employee for the calendar year of the transfer using the employee’s benefit under the transferor plan before the transfer. Additionally, if any portion of an employee’s benefit is transferred in the employee’s second distribution calendar year but on or before the employee’s required beginning date, in order to satisfy section 401(a)(9), the transferor plan must determine the amount of the minimum distribution requirement for the employee’s first distribution calendar year based on the employee’s benefit under the transferor plan before the transfer. The transferor plan may satisfy the minimum distribution requirement for the calendar year of the transfer (and the prior year if applicable) by segregating the amount which must be distributed from the employee’s benefit and not transferring that amount. Such amount may be retained by the transferor plan and must be distributed on or before the date required under section 401(a)(9).
(b) For purposes of determining any required minimum distribution for the calendar year immediately following the calendar year in which the transfer occurs, in the case of a transfer after the last valuation date for the calendar year of the transfer under the transferor plan, the benefit of the employee as of such valuation date, adjusted in accordance with A–3 of §1.401(a)(9)–5, will be decreased by the amount transferred, valued as of the date of the transfer.
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This regulation in combination with other provisions in the 2002 RMD ruling provides some accountability for RMD information and provides the IRS will assurance that the RMD distribution can be determined without simply taking the taxpayer’s word for it, and having to spend more taxpayer time and money making sure the RMD was in fact paid out.
Occasionally, a plan will mess up and transfer the entire amount to the IRA including the RMD. In that case, the taxpayer has an excess contribution in the IRA to correct, in the same manner as if they made too large a contribution to the IRA.
Permalink Submitted by Sidney Poretsky on Sun, 2008-10-05 18:44
Thank you for you time and effort in responding to my question. I now have a better understanding of the regulations and the purpose for them. Not to beat a dead horse, but you wrote that “Any particular IRA custodian has no idea what the prior balance was in an employer plan.”
In this case it’s the same custodian, who, of course knew precisely what the prior balance and (monthly) RMD was. It should be obvious, even to the most casual observer (the IRS), what the amount of the RMD was without having to rely on the taxpayer’s word for it. Also if the RMD was being paid out on a monthly basis – same mutual fund, same custodian, same RMD amount – how can the remaining 4 month’s RMD’s be construed as an excess contribution if it was transferred from the 403b to the IRA? You don’t have to reply to this, as you’ve done enough already, but it still seems to me there should be some exception in a case like this that would allow the custodian to exercise some reasonable judgement.
Permalink Submitted by Al Fry on Sun, 2008-10-05 21:55
One might think all these people at the same company actually talk to each other. My Company has 10,000 employees, and our 403(b) admin was in Portland, Maine, whereas IRA are handled by the individual department in Ft. Wayne, unless it is a custodial IRA, which is handled by the B-D. Because of confidentiality, employes of different departments do not have access to account balance and other data about the same client’s different accounts.