RMD Question
I have a client that rolled over a 403b after retirement to an IRA. The client is 74 and did not take his RMD from the 403b prior to rolling over the money to an IRA. The 403b is through TIAA Cref and they will not allow him to take a full withdrawal to cover his 2012 RMD from what remains with them (about $62k).
Does the RMD definitely have to come from his 403b (meaning we would need to send back money to make up the shortfall) or can the RMD come from his newly established IRA?
Thank you.
Permalink Submitted by Alan Spross on Mon, 2012-11-26 20:50
It is surprising that TIIA did not distribute the RMD.
If not, the RMD for the year of the rollover is deemed to have occurred because the first distribution (the rollover is considered a distribution) is credited against the RMD. Therefore, the client DID take his RMD, but then he did a disallowed rollover of the RMD to an IRA. An RMD is not eligible for rollover. The amount of the RMD that now resides in the IRA would have to be distributed as an excess IRA contribution. Client would report the amount of the RMD as taxable on line 16b of Form 1040. He would also have to request the proper coded excess IRA contribution and explain the situation to the IRA custodian. Only the earnings on the excess IRA contribution would be taxable, if any.
I see that TIIA CREF did not make a full distribution. Any chance the 62k left behind is the 12/31/1986 balance on which RMDs do not start until age 75? If so, the first dollars rolled out are deemed to be the pre 87 balance, so RMDs from the 403b will no longer be avoided on that balance for the rollover year.
Permalink Submitted by Michael Steranka on Mon, 2012-11-26 21:27
Hmm. Thanks for the information. That seems pretty complicated. The amount not rolled over was part that was restricted by TIAA. I’m not sure that it was a balance dating that far back or just TIAA being their normal restrictive selves. TIAA suggested that we either transfer back in the $3000 that is needed to meet the total 403b RMD or have the client write a check for $3000 and say it was a 60 day rollover. I’m ultimately trying to make this as easy/painless as possible for the client.
Permalink Submitted by Alan Spross on Tue, 2012-11-27 03:18
If TIIA says the RMD is 3,000, they are likely factoring in whether there was a 12/31/1986 balance or not. Even if they suggested a transfer of 3,000 from the IRA into the plan so they could re-distribute it as the RMD, that is not correct because that first rollover was deemed to include the RMD.
Should the choice be made to transfer 3,000 to the plan and have them reissue an RMD check, it would probably resolve the problem because the IRS does not know time or dates and will think that it was done correctly the first time. But it is not technically correct if the IRS has any reason to look into this for any reason, although that is extremely unlikely.
What is actually easier for the client depends on both TIIA and the IRA custodian implementing the solution, so it is not possible to determine up front what would actually be easier.
As for why TIIA is holding on to 62k, that would have to be answered by them.
Permalink Submitted by Michael Steranka on Thu, 2012-11-29 14:18
I have come back and read your initial reply a couple of times. The more I think about it (if I am understanding what you are saying) this is probably the least complicated way of making sure the RMD is taken. This is what I am getting from your first reply:
1. Money rolled over to IRA is okay but part should have been taken out as an RMD
2. Part that wasn’t taken out needs to be distributed and coded as an excess contribution
In my mind, the easiest way to do this would be to have the new IRA custodian just send a check out per a LOI stating that $3000 of the original rollover was an excess contribution. My concern is getting this done before 12/31. The other way of sending $3k back to TIAA and then having them distribute that money seems like it could be cutting it close.
I am sending up a check they just brought in as an additional rollover (from a Fidelity 457). Does it make sense to ask the receiving firm (current IRA custodian) to distribute the $3k back to the client as an excess contribution?
Permalink Submitted by Alan Spross on Thu, 2012-11-29 18:09
1) The RMD portion is not eligible for the IRA rollover, but that can be corrected as indicated if it happens. This error happens quite frequently. In some cases, it is not even an error. For example, if the employee is still working after 70.5 and is allowed an in service rollover, there is no RMD involved because he is still working. But if he then retires before the end of that year, he is no longer working and that triggers an RMD from the plan, which the plan cannot complete if there is insufficient balance. Then the RMD amount would need to be taken out of the IRA as an excess contribution as in your client’s situation.
2) Correct. This will not be costly because if the IRA custodian is correctly informed that the distribution is the correction of an excess regular IRA contribution, the 1099R coding will result in only the earnings on the amount of the excess contributions becoming taxable. It may take some explaining to senior IRA custodian staff to get them to understand what happened and what needs to be done.
There is no 12/31 deadline for the corrective distribution, although the sooner the better. The RMD is already deemed made in 2012. The actual deadline for the corrective IRA distribution is the extended due date next year. But completing the distribution this year will result in the 1099R being issued in January instead of the following January, and that will be clearer for the 2012 tax return and for the IRS since they get a copy of that 1099R.
You mentioned a 457b rollover as well. Sounds like the same thing is about to happen for the 457b. It may also have to be solved the same way, but that would not double the problems since both corrective distributions could be ordered the same time and treated the same way on the tax return.
Permalink Submitted by Eleanor B. Deskin on Fri, 2013-07-26 18:31
If the beneficiary of an IRA dies at age 94, how many years does the inheritor of the inherited IRA have to stretch the RMD?
Permalink Submitted by Alan - IRA critic on Fri, 2013-07-26 18:56
You would need to determine how RMDs were determined by the deceased beneficiary, ie. whether beneficiary’s age was used or if beneficiary was older than the owner, if the owner’s remaining life expectancy was used by the beneficiary. The divisor used by the beneficiary in the year of beneficiary’s death would then be reduced by 1.0 for each year thereafter. Note that if the beneficiary was using the wrong divisor, the succeeding beneficiary can correct the divisor and then proceed to reduce the corrected divisor by 1.0 each year.