401k distribution in service for business owner wanting a QCD

Submitted by Michael Arbet on Tue, 2024-09-03 16:58

A business owner turned age 73 this year. His 401k is substantial and as owner his RMD cannot be delayed. RMD is roughly $140k. He has now told us that he is considering a QCD, but 401k’s are not allowed to do QCD. He can do an in service withdrawal and roll plan assets into an IRA, BUT the 401k provider has stated that the RMD must be met first before any assets can be rolled into an IRA. Is there a way to get the 401k assets into an IRA without doing the RMD first? He we like to do the max QCD of $105k (if possible). As stated, the plan allows in service withdrawals, but we don’t see a way to do the QCD as part of the RMD if the RMD must be met before any assets can be rolled into an IRA. After RMD is completed we will roll assets to IRA so we don’t have this QCD problem again.

Thank you for considering this issue.

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Permalink Submitted by Alan - IRA critic on Tue, 2024-09-03 17:33

Yes, unfortunately client is trapped by the calendar due to being one year late on the rollover. The IRA rollover should have been done last year without a 401k RMD and would have produced an IRA 12/31/2023 balance which would have triggered an IRA RMD for 2024 which could have been offset by the QCD.

As it stands there is no way to reduce the 2024 taxable RMD from the 401k plan.

Further, considering delaying all RMDs to the RBD year (2025) will not help because a 401k rollover will require the 2024 401k RMD to be distributed this year in order to establish an IRA balance on 12/31/2024 from which to execute a 2025 QCD. And because he plans to max out the QCD he could not even increase the QCD in 2025 in order to offset 2 RMDs in 2025 if he delayed the rollover . Therefore, in order to be able to start QCDs in 2025, he should do the rollover this year and will have to bite the bullet with the 2024 tax bill.