RMD from a 401 if over 70 1/2 and over a 5% owner

Submitted by Roger Ingwersen on Tue, 2016-11-29 21:33

I have a client who recently left his company (where he was an employee) to start his own company where he is a 50% owner. He has a 401k at his old company – half of which is a non-Roth contribution and half of which is a Roth contribution. What are his options?
1. He would like to rollover the entire amount into his new 401k to avoid having to take RMDs, however he was told that since he is over a 5% owner, he nevertheless would have to take RMDs from his new 401k. Is that correct?
2. If in fact he has to take RMDs from his new 401k, he would then prefer to rollover his 401k – 1/2 into a traditional IRA (the non-Roth component) and 1/2 into a Roth IRA (the Roth component).
3. Is the new Roth IRA a contributory IRA or a Roth conversion?
4. Does he have to take RMDs from the new Roth IRA? Or just the new traditional?

Thank you, Roger



Submitted by Alan - IRA critic on Tue, 2016-11-29 23:36

  1. Yes, that is correct. There is no way here to avoid current RMDs on any of these accounts other than the Roth IRA.
  2. The sooner he rolls over the Roth 401k balance to a Roth IRA, the sooner RMDs will stop on that portion. But he will still have to take an RMD from both sections of the former 401k for this year. If he completes the direct rollovers before year end he will avoid RMDs on the Roth balance for 2017 and beyond, but not for 2016. If he does not get the 401k rolled over this year, he could defer both 2016 RMDs until 4/1/2017 but would then have to take out both the 2016 and 2017 RMDs before doing IRA rollovers.
  3. The Roth 401k direct rollover to the Roth IRA is not considered either a regular contribution or a conversion, just a rollover from Roth to Roth. The amount of contributions he made to the Roth 401k are treated as regular Roth IRA contributions for tax purposes in his Roth IRA, meaning he can withdraw up to that amount tax and penalty free if needed (or the entire amount of the Roth rollover if he first contributed to the Roth 401k at least 5 years ago. If he already has a Roth IRA, chances are it is qualified and fully tax free including the rollover amount. Again, there are NO RMDs for the Roth IRA.
  4. No RMDs from the Roth IRA, but he has to take RMDs from all of the other non Roth accounts. The only question is whether he wants to postpone the RMDs from the old 401k to 2017, but would then have to take 2 years of RMDs in 2017. He will not have a 2016 RMD from the new 401k because there was no balance in that plan on 12/31/2015 and perhaps will not have a balance in that plan on 12/31/2016 either.

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