RMD Requirement Due to 401k Custodian Change/Transfer

Submitted by Jonathan Sard on Thu, 2018-09-27 16:03

A 74 year old has a Uni K plan and he wants to transfer the plan from one investment firm to another. The custodian is telling him that he must take his RMD before they can transfer the account to the new Uni K. Is that correct? I thought that was the case if it was a rollover to an IRA?

Thank you!



Submitted by Alan - IRA critic on Sat, 2018-09-29 02:59

I don’t think the RMD is required because no funds are leaving the plan. If the funds were being moved to another plan or IRA, then a 1099R would be required reporting a direct rollover and the RMD would need to be distributed no later than the distribution. However, if this case there is no distribution and no funds leaving the plan. There should be no 1099R, but if there is the IRS will be expect the RMD to have been distributed before the custodian change. In other words, I think a change of custodian but not of the plan should be treated as a non reportable transfer. That said, an RMD is required for this year anyway, so it may not be worthwhile to contest the requirement of the current firm.

Submitted by Ben Meyer on Sun, 2018-09-30 00:08

  • This situation is covered in Treas. Reg. 1.401(a)(9)-7, Q&A-3(a), which covers the transfer from one 401(k) account to another 401(k) account of the same employer.  Both accounts are considered to be parts of the 401(k) plan of the same employer.  A transfer in this case would be non-reportable, and any portion of the RMD not taken in the transferor account would then be taken from the transferee account, as described in A-3(a) above. 
  • However, if each investment firm has its own plan document, they may be thinking that the transfer is being made between separate plans, even though the employer is the same.  In this latter situation, the movement of funds would be a reportable direct rollover, and the RMD would need to be completed before the rollover. 
  • The transferor organization may be reluctant to perform a non-reportable transfer and may want to only perform a reportable direct rollover due to possible inability of its IT system to handle providing notice of the RMD to the transferee, and of being assured that the transferee will correctly distribute the RMD.  Since the correct distribution of RMDs is the responsibility of the plan(s) for a 401(k), and not the responsibility of the employee, the investment firm may desire to avoid liability by making it a reportable direct rollover instead of a transfer, with the RMD distributed by the time of the rollover.

 

Submitted by David Mertz on Sun, 2018-09-30 00:59

  • I interpret Q&A 3(a) differently.  I don’t see anything that says that the transferor plan is permitted to transfer to the transferee plan responsibility for completing the RMD.  Instead I see it as saying just that the transfer from the transferor to the transferee is not treated as distribution that includes the RMD even if it occurs before the RMD distribution is made (but is still reportable as a direct rollover), and that the transferor needs to retain enough so that the *transferor* can complete the RMD distribution by the distribution deadline.  Of course if the transferor plan is terminating, the timing of the RMD distribution may be dictated by the plan termination date if that’s earlier than the normal RMD distribution deadline.  Although the transferor plan could make the RMD distribution after the transfer of the rest to the transferee plan, the transferor is likely ensuring that poor investment performance does not impede the distribution of the full RMD amount by requiring the RMD to be distributed no later than the date of the distribution of the direct rollover to the transferee plan.
  • Since the RMD distribution must be made before the end of 2018 anyway, there is unlikely anything to be gained by delaying the RMD until year end.  By making the distribution now and investing it in capital assets outside the plan, if held for a year or more any gains would be taxable at lower long-term capital gains rates instead of at higher ordinary income tax rates.

Submitted by Ben Meyer on Sun, 2018-09-30 04:28

  • Under a strict reading of Q&A-3(a) the transferor is permitted, but is not required, to retain an RMD by “segregating … and not transferring that amount.  Such amount may be retained by the transferor plan and must be distributed on or before the date required under section 401(a)(9).”  In any event, when a recordkeeper transfer is performed by an employer, the RMD is not required to be distributed BEFORE OR SIMULTANEOUSLY with the transfer, as is the requirement for a direct rollover.
  • A-3(a) also requires that “the transferor plan must determine the amount of the [RMD]…”.  Again, the transferor is not required to distribute the RMD, and is likewise not required to retain it.  The clear meaning is that the RMD may be transferred to the transferee plan for timely distribution after the transfer is completed (similar to a transfer of an IRA between two IRA custodians.)
  • The reason for the way A-3(a) is worded appears to be to allow an employer flexibility in changing plan administrators or recordkeepers.  A terminated plan administrator, the “transferor”, may refuse to perform any further work, such as determining the amounts of the RMDs.  But this regulation requires the terminated administrator to determine the RMDs, since only the old administrator has access to such needed data as the fair market value on the previous December 31.  The RMD data would then be given to the new plan administrator or recordkeeper, the “transferee”, who will be willing to receive the RMD data along with the transferred funds.  The transferee will then be able to make timely distribution of the remaining RMDs using that information.  
  • When the 401(k) is a solo 401(k), the situation is somewhat different from that of a large employer.  Both the old and the new solo 401(k) plans probably have their own standard form plan documents.  So this may be viewed as a change of plans, even though the employer is the same person or entity.  Also, with only one plan participant, the transferor and the transferee won’t have much motivation to do a lot of work to coordinate and process the RMD data for the current year.  That may well mean that the change of investment firms or plan administrators needs to be done as a reportable direct rollover, with the distribution of any remaining RMD.  Plan provisions for solo 401(k) plans may require this type of treatment.   
  • But I agree that there is probably nothing to be gained by delaying the RMD until year end in this case.

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