RMD for a pension plan rollover

Submitted by Sten Lindquist on Fri, 2018-12-14 21:22

Client has a defined benefit plan with his employer and is 75 years old. He leaves his employer in 2018 so the RBD is 4-1-19. He elects a lump sum payment that he rolls to an IRA in 2018. The pension plan did not take an RMD for him prior to rollover. Is this ok because he rolled over prior to his RBD? Does he get out of his RMD for 2018?



Submitted by Alan - IRA critic on Fri, 2018-12-14 23:33

  • No. The pension plan should have distributed the 2018 and not included that amount in the rollover. The IRA rollover precludes deferring the RMD to 2019. Since the direct rollover to the IRA is treated as a distribution/rollover, the RMD amount is considered to have been distributed since the first distribution in an RMD distribution year is applied to the RMD. The amount of the RMD must be reported as taxable income in 2018. Since an RMD is not eligible for rollover, client now has an excess contribution to his IRA that must be removed with allocated earnings. The earnings will be taxable. This is not costly, but is a hassle to correct and report. The situation must be explained to the IRA custodian and they will treat the RMD as an excess regular IRA contribution. Finally, an explanatory statement is needed on the 2018 return to explain to the IRS that the G coded 1099R includes some RMD money, so a rollover is only being reported for the rest of the rollover. So roughly 4% of the rollover is RMD, the other 96% is OK as a direct rollover.
  • There is a chance that the pension plan DID withhold the RMD amount from the rollover, but just did not distribute it yet. They have until year end to do so, but most plans do not do this. But this needs to be verified before asking the IRA custodian to return the excess just in case there was no excess. Client should also ask the plan administrator why the RMD was not distributed. This happens if the IRA rollover is done before the employer is aware of the retirement, but that does not appear to be the case here.

 

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