RMD REQUIRED WHEN MAKING A 60 DAY ROLLOVER?
I recently was conducting a 60 day rollover of a traditional Ira at age 74 and was told that the full rollover amount could not be deposited in the new account. According to IRS Publication # 590, it was necessary to first take this years RMD for this account BEFORE this transaction could take place. Is this correct? I have conducted 60 day tradition IRA rollovers previously with no RMD being withheld.
Permalink Submitted by Alan Spross on Wed, 2011-04-06 20:31
The indirect rollover situation with IRAs differs from direct transfers. You can do IRA to IRA direct transfers without first taking your RMD.
But when you take the money out, your first distributions in a year are deemed to apply to your RMD. That said, RMDs for IRAs can be aggregated in any combination over all your IRAs if you have more than one. IRA custodians do not know if you have more than one. You might have already satisfied your RMD from another IRA that this custodian does not know exists. For that reason, the current custodian should NOT be refusing the full rollover if you tell them you took your RMD from another account. If you did not take it from another account, then you cannot roll back to this account the amount that equals your annual RMD.
An IRA custodian cannot make you take your RMD from their account if you have other owned IRA accounts and tell them you already took your RMD. They might explain what the rules are, but have to take your word for it if you tell them you satisfied the RMD requirement elsewhere.
If you do direct transfers in the future, it totally eliminates this problem because there transfers are NOT considered distributions and are not reported.
Permalink Submitted by Shirley Hall on Wed, 2011-05-11 23:05
This may or may not be true. If you are rolling over from a retirement pension fund then I understand that you cannot rollover the amount that represents an RMD as in the case of a 401K and a 457 account that the total has to come from the account you are rolling over from and on a 60 day rollover the pension fund and 457 account has to take out 20% of the funds you are withdrawing for tax purposes. I am still trying to investigate just how much the employer takes out with a direct rollover as an RMD is required to be calculated on the full amound and if you only move half of it it seems that your distributions should only relate to half of the amount seeing that the other half remains in the fund and one is receiving distributions on the remaining amount.
Permalink Submitted by Alan Spross on Wed, 2011-05-11 23:17
Any 20% withholding should only apply to amounts in excess of the RMD, because the withholding only applies to what are considered “eligible rollover distributions”. An RMD is NOT eligible for rollover therefore there should be no mandatory withholding on that portion. The prior post was referring to IRA to IRA rollovers, which do not have the same 20% mandatory withholding.
From the qualified plan, the 20% should also not apply to any after tax funds, ie it only is required to apply to the pre tax amount distributed that is in excess of the RMD. If they make an error and withhold anyway, at least the amount they withheld still counts toward the RMD and you get a tax refund when you next file your return.
Permalink Submitted by Shirley Hall on Thu, 2011-05-12 00:25
Well what my retirement office told me that any funds paid out to me for doing a rollover that they are required to take out 20% tax withholding on the amount except for those funds on which taxes have already been made. In other words if a direct rollover is done then the tax withheld would only be on the RMD and I am not sure at what rate. No tax would be withheld on the direct rollover that they would direct that a 20% tax be deducted on the cash amount distributed and one would have to make up the difference from their own cash reserves to invest into another IRA.
Shirley
Permalink Submitted by Alan Spross on Thu, 2011-05-12 00:30
Basically correct, there is no withholding on the amount included in the direct rollover. But the plan is incorrect is they indicate that 20% applies to the amount that is the RMD because 20% mandatory withholding does NOT apply to distributions that are not eligible for rollover. An RMD is never eligible for rollover, so they should not withhold for the RMD unless you want withholding.
The IRS is very clear that 20% mandatory withholding does NOT apply to amounts that are not eligible to be rolled over. Can get the tax code reference if you wish.