401k to IRA Rollover (transfer) after 70 1/2
A person turned 70 1/2 this year and just retired with a 175k 401k balance. He will be in a high income tax bracket this year, but will be in a low bracket next year. Given his tax situation, it makes sense to take his first RMD early next year (by 4/1/14). Is he permitted to do a direct trustee to trustee transfer of the full 175k into a Rollover IRA this year? My understanding is that RMDs must come out before doing a rollover, but since this is a direct transfer AND he has until 4/1/14 to take his first RMD, I thought we could do the rollover now, then do his RMD next year from the IRA.
Thank you!!
Permalink Submitted by Alan - IRA critic on Wed, 2013-03-06 20:36
A direct rollover to an IRA will require the RMD to be paid first. A direct rollover is a two part transaction, a distribution followed by a rollover and the distribution portion is what requires the RMD. The 2013 RMD can be avoided by waiting until Jan, 2014 to do the direct rollover, although 2 RMD will have to be paid then, one for 2013 and also for 2014.
Permalink Submitted by Jonathan Sard on Mon, 2013-03-11 15:10
Thank you. So just to clarify, a trustee to trustee transfer will NOT allow him to move the money to an IRA this year and then take his RMD for 2013 by April 1 of 2014?
Permalink Submitted by Alan - IRA critic on Mon, 2013-03-11 16:50
Correct, it will not. The T to T transfer IS a direct rollover as indicated earlier. For RMD purposes, it is no different than having than receiving a distribution payable to participant, but the transfer does avoid withholding. A non reportable T to T transfer is only available for IRA to IRA transfers. While the funds may move in the same manner to the new account, a direct rollover is different than a T to T IRA to IRA transfer, as the RMD must still be distributed with a direct rollover.
Permalink Submitted by Ben Meyer on Tue, 2013-09-03 14:58
Why wouldn’t a direct Trustee-to-Trustee transfer from 401(k) to IRA be within scope of TR 1.401(a)(9)-7 A-3, which states “the transfer is not treated as a distribution by the transferor plan…”. This regulation seems to be saying that a direct T-to-T transfer would not be a distribution that would require it to carry the RMD out of the transferor plan. This seems to imply that the RMD can be performed later, as is desired by the submitter of this question, if you also assume that adequate funds are left in the transferor plan for the RMD at a later date (but before the RBD).
Permalink Submitted by Clyde Wolf on Tue, 2013-03-12 22:10
As I understand this situation, the person in the OP that just turned 70 1/2 in 2013 has this schedule:- 2013 RMD taken after January 1, 2014 but before April 1, 2014.- 2014 RMD taken anytime during 2014 but before transferring the 401k to an IRA.- Transfer the 401k to the IRA after the 2014 RMD is taken. I believe this has been discussed before, the 2013 RMD would be determined using the 401k balance as of December 31, 2012.The 2014 RMD would use the 401k balance as of December 31, 2013 Minus the 2013 RMD (distributed in early 2014)?
Permalink Submitted by Alan - IRA critic on Tue, 2013-03-12 22:55
cwolf, all correct except that the 2014 RMD must be calculated using the actual 12/31/2013 balance. The adjustment for the first RMD was eliminated in the 2002 RMD Regs with the goal of simplifing the RMD calcs. The result is that delaying the first RMD till the second RMD year will cause the second year RMD to be slightly higher, around 3.7% more than if the first RMD was not deferred to the RBD year.
Permalink Submitted by Clyde Wolf on Wed, 2013-03-13 23:53
Alan, Thank you!