Permalink Submitted by Alan Spross on Wed, 2011-10-19 04:14
The vast majority of 401k plans do NOT require RMDs at 70.5 unless the employee is a 5% or greater owner of the company. If this applies to his plan, his first RMD is not due until 4/1 of the year following the year he retires. If he retires a year from now just after reaching 70.5, his first RMD would be due 4/1/2013 for the 2012 year.
If the plan allows him to take a full distribution while still working, he could convert to a Roth IRA by 12/31/2011 and avoid RMDs on the balance converted. However, if he continues to contribute he will create another small balance in the plan on 12/31/2011 on which his 2012 RMD would be based if he retired before the end of 2012.
If he then retires after doing another conversion in 2012, there is no guidance from the IRS on whether his 2012 RMD is eliminated or not by the conversion. There is nothing the plan could do if there was no balance and the IRS would likely not consider that some of his conversion was his RMD and an excess contribution to his Roth IRA. Unlike IRAs, the IRS would not know that he had a 12/31/2011 balance in the 401k plan because the plan does not report that info to the IRS.
The question is whether the plan allows him to do these conversions while he is still employed, but due to his age he might well be allowed to do this.
Permalink Submitted by Alan Spross on Wed, 2011-10-19 04:14
The vast majority of 401k plans do NOT require RMDs at 70.5 unless the employee is a 5% or greater owner of the company. If this applies to his plan, his first RMD is not due until 4/1 of the year following the year he retires. If he retires a year from now just after reaching 70.5, his first RMD would be due 4/1/2013 for the 2012 year.
If the plan allows him to take a full distribution while still working, he could convert to a Roth IRA by 12/31/2011 and avoid RMDs on the balance converted. However, if he continues to contribute he will create another small balance in the plan on 12/31/2011 on which his 2012 RMD would be based if he retired before the end of 2012.
If he then retires after doing another conversion in 2012, there is no guidance from the IRS on whether his 2012 RMD is eliminated or not by the conversion. There is nothing the plan could do if there was no balance and the IRS would likely not consider that some of his conversion was his RMD and an excess contribution to his Roth IRA. Unlike IRAs, the IRS would not know that he had a 12/31/2011 balance in the 401k plan because the plan does not report that info to the IRS.
The question is whether the plan allows him to do these conversions while he is still employed, but due to his age he might well be allowed to do this.