RMD for IRA Owner who had an In-Service Withdrawal but is still working.
Facts
- Client is 74 years old (RMD age).
- Client has not retired yet, but plans to soon.
- Client’s 2024 year-end retirement accounts included a Traditional IRA ($0 balance on 12/31/24) and a workplace 401k (had some balance on of 12/31/24).
- Client took an In-Service Withdrawal from his workplace 401k of $825K in July 2025 and rolled it over to his Traditional IRA.
Questions
- Does the client have a 2025 RMD for his Traditional IRA assuming he were to retire on 12/1/25 (or sometime before the end of the year)?
- Does the client have a 2025 RMD for his Traditional IRA assuming he were to retire on 12/31/25 (in 2025 but right at the end of the year)? I assume this and #1 are the same.
- Does the client have a 2025 RMD for his Traditional IRA assuming he were to retire on 1/1/26 (or anytime after the 2025 calendar year).
Permalink Submitted by Alan - IRA critic on Mon, 2025-07-28 11:00
All 3 questions deal with the IRA. There is no IRA RMD for 2025 if there was no IRA balance on 12/31/2024. The large rollover will trigger IRA RMDs in 2026 based on the IRA 12/31/2025 balance.
But the issue here is the 401k RMD. There is no 2025 4o1k RMD if client works into January before retiring. However, if the client retires anytime this year 2025 will become an RMD year for the 401k. Part of the 825k rollover will have to be reported as the 2025 401k RMD and taxable. For example, if the 12/31/2024 401k balance was 1mm and client will be 74 at the end of 2025, the 401k RMD will be 1mm/25.5 or 39,216. This amount will be taxable in 2025, and that amount was also not eligible to be rolled over to an IRA because it’s an RMD. 39,216 will be treated as an excess IRA contribution and will have to be withdrawn from the IRA with allocated gain or loss. The IRA removal of excess (except for any gain on the excess) will not be taxable if correctly requested as an excess removal from the IRA custodian. The gain will be taxable in 2025.
This is a typical issue when an employee rolls over 401k funds in a year and retires that year instead of waiting until January to retire. Note that the above is more of a reporting hassle than being costly since it basically is the same tax outcome that would have occurred if the employee retired, but did not do that rollover. Nonetheless, if the client wants to avoid the above detail, he should postpone retirement to January, 2026.