When is RMD required for new IRA that came from a 401k?

Submitted by Thomas MacDonnell on Mon, 2016-12-12 23:12

My client turns 70.5 in January 2017 and plans to work for most or all of 2017. We plan to take an “in-service” transfer withdrawal in early January 2017 and establish an IRA with approximately $200,000. How do we calculate any RMD and when does he need to take it? He will not have a year-end IRA balance 12/31/2016, (since all his money was in his 401k). Does he need to take any RMD in 2017, or does his 1st RMD get pushed to 2018?



Submitted by Alan - IRA critic on Tue, 2016-12-13 01:45

  • If he does the in service rollover in 2017 but then retires anytime in 2017, then 2017 becomes a 401k distribution year. That means that up to the RMD amount, his rollover will be an excess IRA contribution which must be corrected in the usual manner. The 401k RMD will have been satisfied in the process, so the first IRA RMD is not due until 12/31/2018 based on the year end 2017 IRA balance. The 401k plan would recognize the retirement and issue two 1099R forms, one for the premitted rollover and the other for the RMD amount which would be reported as taxable income on line 16b of Form 1040.
  • Conversely, if he retires in 2018 the in service rollover will not include an RMD and would be intact as is.
  • This assumes he is not a 5% owner under which RMDs would be required by the plan whether he retires or not.
  • If he thinks the chances of retirement this year are high, he might delay the in service rollover so he could defer the 2017 plan RMD into 2018. While 2018 would have two plan RMD distributions, this will prevent an RMD in 2017 from being added to his wages for the entire year, meaning his RMD would be taxed at a lower rate in 2018 than it would in 2017. This all depends on the numbers, when he retires and how large his 401k balance is.

Submitted by Thomas MacDonnell on Tue, 2016-12-13 05:21

Thanks for your explanation but it actually has confused me even more.  The in-service withdrawal should be a non-taxable event that we plan to take around the time he turns 70.5 in January 2017.  You seem to indicate that if he retires in 2017, then he needs t to Aker an RMD by the end of 2017.  How is the RMD calculated when there is no prior year-end balance to reference?

Submitted by Alan - IRA critic on Tue, 2016-12-13 16:35

I am referring to the RMD from the 401k, not the IRA. The tax code applies the first distribution in an RMD year against the RMD. While there is no RMD if he works into 2018, you indicate a good chance he will retire in 2017 at some point. That makes 2017 a 401k RMD distribution year. As such, the portion of the in service rollover (less than 4% of it if the in service rollover is for the full balance) would include the RMD and the plan would issue a 1099R showing the RMD as taxable. In summary, retirement in 2017 creates an RMD out of a small portion of the in service rollover. There would be no RMD from the IRA until 2018. RMDs are due from the plan that held the balance on the prior 12/31. Yes, this is a confusing topic.

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