401k to IRA –RMD

Submitted by Wendy Mommaerts on Wed, 2016-08-17 14:21

We have a client (age 79) that worked for a company in 2015 (no RMDs were taken as she was still working). 401k is now being dissolved and our client is rolling over her 401k into an IRA. Client is now retired. We are assuming the client is required to take an RMD for 2016 even though the YE balance reflects the time she was still employed?



Submitted by Alan - IRA critic on Wed, 2016-08-17 17:27

You are correct. If she retired in 2016 and wants to do an IRA rollover, the 401k RMD must be distributed to her and cannot be included in the IRA rollover. The RMD would be calculated using the plan balance at the end of 2015. If for some reason she wanted to defer her first plan RMD to 2017 (required beginning date 4/1/2017), she could not roll over the rest of the plan to an IRA in 2016.

Submitted by Wendy Mommaerts on Wed, 2016-08-17 17:34

What happens if our client already had her rollover check before coming to our firm (no RMD was taken)?

Submitted by Alan - IRA critic on Wed, 2016-08-17 17:47

  • Then she might as well complete the rollover, then request an excess contribution distribution from the IRA custodian for the amount of the RMD. The IRA custodian must calculate any earnings, but if the corrective distribution is requested right away, there should be no earnings or a very small amount of earnings. So this should not result in any extra taxes.
  • That said, this could be a reporting hassle for her 2016 tax return because she will not be able to report exactly what the 1099R indicates unless the plan issues two 1099R forms. If the plan just issues a typical 100% direct rollover 1099R coded G, she will have to report the amount of the RMD as taxable income on line 16b and show “rollover” next to 16b. Then if there are any earnings in the IRA when the IRA custodian makes the corrective distribution, those earnings will be taxable income on line 15b of Form 1040 with the IRA distributed amount on line 15a. An explanatory statement should be included explaining why she reported a portion of the direct rollover as a distribution.
  • This happens frequently when an employee over 70.5 does a rollover while still working, then retires before the end of that year, turning that year into an RMD distribution year in which the RMD was rolled over.

Submitted by jeff klein on Tue, 2017-01-31 20:46

Would it be acceptable for the plan to issue two 1099Rs?  In this situation will she have satisfied her RMD requirement for the Plan?

Submitted by jeff klein on Tue, 2017-01-31 20:48

Would it be acceptable for the plan to issue two 1099Rs?  In this situation will she have satisfied her RMD requirement for the Plan?

Submitted by Alan - IRA critic on Wed, 2017-02-01 00:43

If the RMD for the first RMD distribution year is deferred up to 4/1 of the following year, then two RMDs must be distributed before doing an IRA rollover, one RMD for the year of retirement and the other for the following year. These RMDs can be reported on a single 1099R since they would both be distributed in the same year even though 2 RMDs are satisfied. There can also be a single check instead of separate checks. Not sure why a plan would issue two 1099Rs for the same account year with the same code in Box 7, but it is not a problem if the plan does this. Not sure if this answers your question.

Submitted by Wendy Mommaerts on Wed, 2016-08-17 18:12

ok, what would happen if the client is still employed with the same employer (the 401k plan dissolved) and the employee’s were given options of what they need to do with their accounts.  Would the employee’s that are still employed be required to withdraw their RMD prior to rolling the funds to an IRA?  Or would their 1st RMD process in 2017?

Submitted by Alan - IRA critic on Wed, 2016-08-17 18:52

As long as the client remains employed with this employer, there is no RMD required. Of course, this assumes client is not a 5% owner. Termination of the plan does not trigger RMD as long as employee remains employed, and these employees should be able to roll their entire plan balance into an IRA without RMDs being distributed. Of course, if they are no longer employed on 12/31/2016, that will create an RMD year for those of RMD age.

Submitted by Wendy Mommaerts on Wed, 2016-08-17 19:12

So if we understand this correctly. Our client who is 79 yrs old, still employed with the employer who dissolved their 401k plan (employer gave the employee the options to move their accounts), has decided to rollover her 401k to an IRA IS NOT required to withdraw an RMD because she is still employed with the same employer.  Will she then begin taking RMD’s from this new IRA in 2017?    SORRY for the many questions, just want to make sure we don’t mess anything up.

Submitted by Alan - IRA critic on Wed, 2016-08-17 19:34

Yes, the increased IRA balance on 12/31/2016  resulting from the 401k rollover will increase IRA RMDs for 2017. Therefore, dissolving the 401k plan will result in those employees over 70.5 who continue to work there having to take IRA RMDs from money that was formerly protected from RMDs when it was in the 401k plan. But the higher IRA RMDs would not start until 2017 based on 12/31/2016 balance.

Submitted by Wendy Mommaerts on Thu, 2016-08-18 13:34

question from advisor, just so we are on the same page…our client is 79, rolled over her 401k to a new IRA (plan dissolved)client still employed with the employer.  401k was rolled over middle of 2016 in which the rollover funds are now in an IRA for 6 months.  Will our client be required to request a RMD in 2016.Would your answer be the same if the client rolled over her 401k on Jan 5th of 2016, leaving the funds in the IRA for a full year?

Submitted by Alan - IRA critic on Thu, 2016-08-18 19:04

As long as client works beyond 2016, there is no RMD required from the 401k plan. And there is no IRA RMD on this balance because this balance was not in an IRA on 12/31/2015. This is true regardless of the date in 2016 of the IRA rollover.

Add new comment

Log in or register to post comments

Sign up to receive The Slott Report each week