RMD
My client’s DOB is 5/13/1941. He retired in March 2011. In June 2011, he rolled his 401(k) and a Pension (using a Lump Sum Payment calculation) to a Traditional IRA. He was an active participant in the 401(k) and pension plan until retirement in March 2011.
What values should be included in calculating his RMD payment due by 12/31/2011? The IRA doesn’t have a 12/31/2010 value and the pension lump sum wasn’t calculated until he retired in March 2011.
Thank you,
Ty Trainor
Permalink Submitted by Alan Spross on Thu, 2011-11-10 19:04
Since client will reach 70.5 in 2011, even though he has not reached his required beginning date, 2011 is an RMD distribution year and the plan’s 2011 RMD should not have been included in the IRA rollover.
Because a direct rollover is considered a two part transaction, ie a distribution followed by a rollover, both his 401k and pension plan RMDs have been satisfied by the distribution. The infraction is that the amount of the RMDs was not eligible for rollover to the IRA and must be treated as an excess regular contribution to the IRA. This is corrected like any other IRA excess contribution. Explaining this to the IRA custodian might be difficult, so client should ask to talk to someone experienced so that the IRA distribution will be reported correctly as an excess contribution correction.
There should not be a problem using the pension lump sum value in 3/2011 to add to the 12/31/2010 401k value to calculate the total RMD amount for 2011. This will be the amount to report to the IRA custodian as an excess contribution to the IRA for removal.
For 1040 reporting, he should show the RMD amount as taxable on line 16b. If there are earnings on the corrective IRA distribution, the earnings go on line 15b. If he had an IRA balance independent of this rollover, he could take that RMD this year or defer it until the required beginning date of 4/1/2012.
Permalink Submitted by TY (Edward. L) Trainor on Tue, 2011-12-06 21:07
This is a continuation of the question answered below. My client turned 70.5 this year, retired and rolled his cash balance pension plan to his IRA. Since the cash value pension lump sum value was calculated in 3/2011 (didn’t have a year end value), that is the amount the client used to calculate the excess contribution that needs to come out of the IRA.
In this case, the total rollover amount was $213,943.86 and the excess contribution requested was $7,808.17 (and the check left yesterday). Today the client recieved a letter from the pension administrator saying they messed up and the client should request an excess contribution of $18,904.78.
I called the pension administrator and asked how they calculated the RMD. They said that even though the client selected the lump sum payment option, his RMD is calculated by using his single life monthly annuity pensio multiplied by 12. Is this correct?
Thank you,
Ty Trainor
Permalink Submitted by Alan Spross on Tue, 2011-12-06 22:36
Here is a copy of the applicable IRS Reg 1.401(a) 9-6 Q. 1 for DB plans and annuities RMDs. These regs were published in 2004:
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(d) Single sum distributions. In the case of a single sum distribution of an employee’s entire accrued benefit during a distribution calendar year, the amount that is the required minimum distribution for the distribution calendar year (and thus not eligible for rollover under section 402(c)) is determined using either the rule in paragraph (d)(1) or the rule in paragraph (d)(2) of this A–1.
(1) The portion of the single sum distribution that is a required minimum distribution is determined by treating the single sum distribution as a distribution from an individual account plan and treating the amount of the single sum distribution as the employee’s account balance as of the end of the relevant valuation calendar year. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee’s first distribution calendar year has not been distributed, the portion of the single sum distribution that represents the required minimum distribution for the employee’s first and second distribution calendar years is not eligible for rollover.
(2) The portion of the single sum distribution that is a required minimum distribution is permitted to be determined by expressing the employee’s benefit as an annuity that would satisfy this section with an annuity starting date as of the first day of the distribution calendar year for which the required minimum distribution is being determined, and treating one year of annuity payments as the required minimum distribution for that year, and not eligible for rollover. If the single sum distribution is being made in the calendar year containing the required beginning date and the required minimum distribution for the employee’s first distribution calendar year has not been made, the benefit must be expressed as an annuity with an annuity starting date as of the first day of the first distribution calendar year and the payments for the first two distribution calendar years would be treated as required minimum distributions, and not eligible for rollover.
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Accordingly, the Regs allows the employer to make a choice between using the account balance or the potential annuity payment. Therefore, this particular option appears to be a plan document issue and not an IRS issue. Perhaps the plan administrator should be asked if there are any provisions under the plan which allows them to make a choice other than the annuity flow when such annuity payment never began and the lump sum option was chosen by the employee.