RMD from 401k

Submitted by Scott Muss on Thu, 2016-11-10 17:43

A client has recently accepted a retirement package from her employer. The “termination date” is to be 12/31/2016 while the “retirement commencement date” is 1/1/2017. The client turned 70.5 earlier this year and has been contributing to the company’s 401k. Since her termination date is to be 12/31/16, will she need to take an RMD for 2016 now? Does she need to back out any 401k contributions made this year?



Submitted by Alan - IRA critic on Thu, 2016-11-10 22:46

The contributions are fine, but her retirement date is considered to be 12/31/2016 which will result in 2016 becoming an RMD distribution year. The required beginning date will be 4/1/2017, so she will have the option of deferring the 2016 RMD to 2017. She will have to take both the 2016 and 2017 RMDS in 2017 (2016 by 4/1), but that might spread out taxable income more equally since she will have worked all of 2016. If she does an IRA rollover in 2017 she will have to have both RMDs withheld from the rollover because they are not eligible to be rolled over. If she wants to avoid a 2016 RMD altogether, perhaps she can negotiate a retirement date in January instead of December.

Submitted by David Hogan on Wed, 2016-11-16 12:46

i retired on March 31 of 2016. I had rolled my Vanguard IRA to my 401 -k plan years ago in what is called a pooled account..At retirement I transferred my Vanguard account to to my name as an IRA. Then based on the balance in my 401-k at 12/31/15 I took my required RMD for 2016. Should I have taken the RMD while the funds were under the 401-k plan and then made the transfer.The RMD for 2016 comes out exactly the same either way but I seem to remember reading that you must take the RMD and then transfer. If that is the case is there any way to correct. 

Submitted by Alan - IRA critic on Wed, 2016-11-16 17:04

  • Your retirement made 2016 an RMD distribution year for the 401k, so if the plan knew you were going to retire OR certainly if the rollover was done after your retirement, the plan should have distributed the RMD first or at the same time as your direct rollover. Not having done that, the plan RMD has been rolled over to your IRA. Note that the plan RMD is considered satisfied in the rollover, but RMDs are not eligible for rollover so you now have an excess IRA contribution to the extent of that plan RMD amount.
  • Problem here is that you withdrew the RMD as a normal distribution from the IRA rather than as a corrective distribution with any allocated earnings. The 1099R from the IRA will be wrong and it is probably too late to roll that money back into the IRA (60 day time limit) and have the corrected distribution done correctly. You also do not know what the plan is going to do with their 1099R. Technically, they should catch their error and issue you two 1099R forms, one for the amount of the RMD coded as a distribution and the other for the balance of the direct rollover.
  • How long ago did you take the IRA distribution? 

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