401(k) to IRA rollover
I am 74. I retired finally January 29, 2016. I have a 401(k) still with my former employer and its 401(k) financial institution. This 401(k) is approximately half Roth and half Traditional. I want eventually (by next year) roll the entire 401(k) into Roth and Traditional IRA’s at a different financial institution. Because of high administrative costs with the 401(k) holder, I prefer to do this as soon as possible. I also want to postpone taking the 2016 RMD from the Traditional element of this 401(k) until April next year (2017); and take the 2017 RMD by end-December next year (2017). I had been thinking of moving (rolling over) the Roth element of the 401(k) now–in 2016–into the destination Roth IRA already existing at the different institution. I also had been thinking of leaving the Traditional element of the 401(k) where it is now, with the former employer’s financial institution, until next year (2017) and moving (rolling over) it into the Traditional IRA elsewhere in early 2017. In that scenario I would take the first RMD by April 2017 and the second RMD by December 2017.
Problem and question: The former employer’s 401(k) institution informs me that, if I move (roll over) the Roth element of the 401(k) now (in 2016) into the Roth IRA existing elsewhere, I shall have to take the RMD on the remaining Traditional element of the 401(k) during calendar 2016 (not wait until April 2017) in order to avoid the 50-percent penalty. Some IRA advisors (at Vanguard and at USAA) have told me that this requirement is not from the IRS but must be a requirement of the former employer’s 401(k) institution.
Is this correct? If so, then I would elect to leave both the Roth and Traditional elements of the 401(k) with the former employer’s 401(k) institution through 2016 and do the rollover into the IRA by April 2017. and take the first RMD by April 2017 and the second RMD by end-December 2017.
Thank you
Permalink Submitted by Alan - IRA critic on Thu, 2016-04-21 23:22
IRS Reg 1.401(9)-8 Q 2 refers to aggregation of RMDs from DC plans. This Reg was written before Roth 401ks were adopted and therefore there are various interpretions taken by the plans. While a plan may be more restrictive than the IRS statutory rules in any event, it is important to know the statutory rule because a plan RMD that is NOT a statutory RMD can be rolled over. If the plan distributes to you the total RMD for both parts of the plan even though you are only rolling over the Roth portion, it is not clear whether you can roll over the pre tax RMD to eliminate taxes on both portions in 2016. However, the only way to eliminate an RMD based on the Roth balance in 2017 is to roll the Roth out before year end 2016. Did the plan tell you whether the dollar RMD of the pre tax balance will be distributed from the pre tax plan OR if it would distribute both RMDs from the Roth portion. There would be a tax difference dependent on that. As you can see this is a very complex issue.
Permalink Submitted by Ben Meyer on Sun, 2016-04-24 17:32
This is another situation where a 401(k) plan is making a nonobvious interpretation of the IRS regulations. A previous recent thread also touched on this topic. It appears that the plan is willing to take the complete RMD solely from the non-Roth account. The implication is that the designated Roth account has not yet reached 5-year qualification, which would be consistent with the apparent rule knterpretation allowing this type of aggregation. But normally the distribution of RMD must be performed before a direct rollover of a 401(k) to an IRA, since this is a reportable event. In this case it appears that the 401(k) recordkeeper will allow the direct rollover after the RMD, but within the same calendar year. The recordkeeper knows that both of these events are reportable via appropriate coding on form 1099-R. But since the exact dates within the calendar year are not reportable, the recordkeeper believes that doing it all within the same calendar year should be satisfactory. All will appear satisfactory at the end of the year when the 1099s are issued for both the RMD and the direct rollover.
Permalink Submitted by Kris Loree on Thu, 2016-04-28 13:10
If a participant with a Roth401(k), that has been open for 5 years, retires and wants to roll the Roth401(k) to a new Roth IRA, (does not own any other Roth IRAs), is there a 5 year qualified distribution requirement for the new Roth IRA, or does the 5 years from the Roth 401(k) “carry over”?
Permalink Submitted by Alan - IRA critic on Thu, 2016-04-28 16:07
The holding period for the Roth 401k no longer applies, and must begin from scratch for the Roth IRA. However, the amount contributed to the Roth 401k is treated as regular Roth IRA contributions in the Roth IRA, and these come out first under the Roth IRA ordering rules. Therefore, the bulk of the rollover could be distributed without tax or penalty, while amounts in excess of the Roth 401k contributions do not become tax free until both 5 years in the Roth IRA and age 59.5 have been attained.