Individual Roth 401K RMD
A 72 year old who is working made a contribution to a Individual 401k (sole participant, 100% owner). He made a Roth employee deferral of $10,000 on 12/30/16. He has no other Roth IRA assets. He now has to take an RMD from the Individual Roth 401k.
Is the RMD subject to the early withdraw penalties, similar to a Roth IRA for not having the assets for five years in the Roth account?
If so, and since the account was held in cash through 1/1/17, could it be considered 100% basis?
Thank you for the help.
Permalink Submitted by Alan - IRA critic on Fri, 2017-01-06 20:00
An RMD is never subject to early withdrawal penalties, nor is a Roth distribution after age 59.5. His distribution will include a pro rated amount of earnings at the time of the distribution. If his account is worth 10,400 when he takes out his RMD, roughly 4% of his RMD will be earnings. So if his RMD is $400, the taxable portion of his RMD will be around $16. But no penalty unless he fails to complete his RMD.
Permalink Submitted by William Tuttle on Fri, 2017-01-06 22:02
He will have to take the RMD for 2017. because he had a Roth 401k balance on 12/31. However, there is a likely workaround to this in the future. It is likely that this individual 401k allows in-service withdrawals/rollovers of even deferrals with age >= 59 1/2. In 2017, the client should take the RMD first, then rollover the balance to a Roth IRA and not make a 2017 contribution in 2017 unless there is a companion rollover of the balance before 12/31. There will be no balance on 12/31/17 and thus no RMD. Then before the 2017 tax filing deadline in April 2018, make the individual 401k contributions, followed by an in-service rollover of the entire balance. There will be no balance on 12/31/18 and thus no RMD. Rinse and repeat. The key is to only make future contributions if there is time to rollover the balance before 12/31. No 12/31 balance no RMD.