401K RMD ERROR WITH PARTIAL NUA
This year I processed my first 2 years RMD from my 401K using a partial NUA for some of the stock to a brokerage account. Everything else was rolled over to an existing IRA in cash or in-kind shares. Unfortunately, a last-minute stock price drop on the day of execution caused the NUA RMD amount to be about $1500 short of the required RMD distribution, from looking at the transaction documents from my plan administrator. (1099’s won’t be available until next year). I tried a last-minute correction to the number of NUA shares on the day of execution, but it was somehow lost in the plan administrators back office.
In reading thru your extensive database over the years it has clarified a lot of issues for me, but I want to be sure of my next steps. From what I understand the NUA process & LSD distribution of the 401K technically solves my 401K RMD even though the amount that went into the brokerage account was short about $ 1500. I believe the resulting rollover to the IRA thus created a $1500 excess contribution that needs to be fixed, ideally this year. Is this correct?
So to solve my 401K RMD & resulting excess contribution, I think I need to request an excess contribution withdrawal from my IRA provider to fix both issues this year. I also have an RMD required from the IRA this year, but I haven’t taken it yet. Does it matter if I take the RMD withdrawal from the IRA before the excess contribution is fixed, or should it be fixed first. Will there be one combined 1099 for the IRA RMD & the correction, or will there be two 1099’s?
Thanks for all the information & guidance you provide on the website.
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-10 12:20
Actually, two years of RMDs have been distributed from the plan because any distribution done this year (including the direct rollover) must be allocated to your 2024 and 2025 RMDs. You are correct that to the extent the value of the NUA shares distributed falls short of those two RMDs, you have an excess IRA contribution which must be removed in the usual manner. Note that the gross value of the NUA shares counts toward your RMD, not just the NUA amount.
The question I have regarding your figures is if the 1500 is the shortfall for only the first year or if it’s for both years. If it’s only for the 2024 RMD, then you have a much larger excess contribution which includes the entire 2025 RMD.
With respect to the IRA RMD, I think you completed the 2024 IRA RMD, but not 2025. It does not matter whether you complete the 2025 IRA RMD before removing the excess or after but note that the removal of excess due to the 401k rollover does not count toward your 2025 IRA RMD.
This is not costly, but does create a filing hassle, because you will have to report a portion of the IRA direct rollover as taxable (the RMD amount rolled over). You would then tell the IRA custodian the amount of your excess contribution due to rolling over RMD money and they will remove the excess as adjusted for gain or loss). Any gain will be taxable for the year the excess contribution was made (2025).
For 2025 you will receive a plan 1099R for the NUA share distribution, another for the direct rollover coded G, and two from the IRA custodian, one to report the removal of your excess contribution coded as such and the other for the IRA RMD.
Permalink Submitted by Joseph Smith on Mon, 2025-03-10 15:25
Thanks Alan, that is what I expected.
For the plan rollover 1099 (coded G), would I include the $ 1500 as taxable instead of as part of the rollover and add a note of explanation why the amount doesn’t match the 1099 when doing taxes next year?
The $ 1500 shortage for the 401k distribution is the total for both years RMD. I delayed the first year (2024) until early this year and combined the two RMD’s into one which was intended to be covered by the NUA transfer to the brokerage account ( NUA amount + basis). The total market value of the shares transferred was about $ 1500 short of meeting the required RMD amount.
Thanks again for all the great work you do.
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-10 15:56
Yes, the 1500 should be reported as a taxable distribution (RMD), and an explanatory statement included as to why.