Can I Start Taking RMDs Then Stop if I Resume Working?
By Beverly DeVeny and Joe Cicchinelli
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In this week’s Slott Report Mailbag we answer questions on (dreaded) excess IRA contributions and the penalties involved as well as whether an individual can start taking RMDs (required minimum distributions) only to start working again and halt taking them. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
1.
Excess Roth Contribution Nightmare:
I had no earned income for several years when I contributed to my Roth IRA, which has done well over that period, up about 50%.
Question: How can I determine the best course of action with respect to the earnings on the excess contribution? My understanding is that I can remove them and face a 10% early withdrawal penalty (PLUS 6% for excess contribution?) or leave them in and start recharacterizing the excess to future years. I am VERY confused, any general answer helpful here!
Joe
Answer:
Any excess Roth IRA contributions are subject to a 6% penalty each year until they are corrected. There is no statute of limitations for the IRS to go back and asses the penalties if you did not file Form 5329 for the years of the excesses. Any earnings on an excess for 2013 or earlier do not need to be removed because it’s past the October 15 deadline to correct them without the IRS 6% penalty. You should speak to a tax advisor to file Form 5329 and pay the IRS penalties.
Although the tax code does not mandate that you remove the earnings on some of your excess contributions, you should take into account whether or not the earnings are eligible to remain in the account. If this is your only Roth IRA, it was funded with ineligible contributions and accordingly you could argue that the earnings should also be removed. However, this is an area where IRS has not issued any guidance.
2.
Is it true that if you held a buy-and-hold strategy, putting $100,000 in a taxable account in an index fund, it would be more advantageous than a Traditional IRA since gains in the taxable account would only be 15% (capital gains) vs. 31% when and if IRA funds were distributed after reaching age 70 ½ in retirement?
Answer:
Investments inside a Traditional IRA grow tax deferred, which means taxes are not due that year on any investment gains. However, distributions from IRAs will be taxed at ordinary income tax rates. You should speak to a financial planner to decide whether investing your money in a taxable versus tax-deferred account is better for you based on your particular facts and circumstances.
3.
Ed,
In researching an RMD (required minimum distribution) issue for my mother-in-law, I ran across a discussion forum on your website and decided I’d reach out to you for your thoughts. Here’s the situation:
My mother-in-law turned age 70 ½ in 2010, but remained working with her employer of nearly 40 years through the middle of 2013. As a result, she took her first RMD from her employer at the end of 2013. However, during 2014 she went back to work for the same employer, on a part-time basis, in 2014. Based on the amount of hours she worked, she is eligible to participate in the 401(k) in 2014. So she is un-retired for the purpose of the plan. Can she suspend her RMD in 2014 after having taken her initial withdraw in 2013?
Any thoughts that you have would be welcome – and you certainly have permission to use this question on any of your forums.
Thank you,
Joe Peta
Answer:
If she still has a balance in the 401(k) plan and she is still working for that employer, she does not have to take an RMD from that plan if the plan has that feature – even though she took a distribution in 2013. However, whether or not she is considered “still working” is based on facts and circumstances and ultimately it is up to the 401(k) plan administrator to decide that.