RMD Secure Act TSP to IRA

Submitted by S Roy on Wed, 2020-01-15 22:24

In December 2019 I had requested a direct rollover of 100% my TSP funds to an IRA with Vanguard. The rollover was effected on January 3, 2020. However, TSP also made a RMD and with held a 10% Federal tax. They have already sent me the check for RMD minus the tax.

I think RMD is in error since I do not turn 701/2 until 4th quarter 2020, distribution age by the old rules also the Secure Act extended the RMD age to 72 effective January 1, 2020.

When pointed out TSP responded as follows –
This responds to your inquiry of January 13, 2020, concerning your Thrift Savings Plan (TSP) account. You stated that your required minimum distribution (RMD) was disbursed in error. The SECURE Act of 2019 will increase the RMD age from 70½ to 72. Because you will reach age 70½ in 2020, your first RMD year should be the year that you reach age 72. However, if you request a withdrawal before our systems are updated for the SECURE Act of 2019, your withdrawal may be treated as an RMD payment. For single payments and
installment payments lasting less than 10 years, the TSP will only withhold 10% from the RMD portion of your payment for federal taxes. RMDs cannot be transferred to an IRA or eligible employer plan. Therefore, if you are required to receive a minimum distribution and you choose to transfer your single payment or an eligible installment payment when you make your withdrawal election, the TSP will calculate your RMD amount, remove it from the transfer, and mail it directly to you in a separate check, or send it to your checking or savings account if you chose direct deposit.

My questions – Can/should I deposit the check to the rollover IRA as an indirect rollover even though it will be against IRS regs? Or Must I accept this RMD with no recourse?



Submitted by Alan - IRA critic on Thu, 2020-01-16 00:24

  • What the TSP is telling you makes absolutely no sense. It seems that you have been caught up in an incomplete systems upgrade that somehow caused the system to react in a way that is not consistent with pre Secure OR Secure. In any event, what was distributed to you is NOT an RMD and you therefore certainly can and should roll it over to an IRA. That said, you will have to replace the withholding with other funds to complete the rollover. To add to the confusion, do you even know if the distribution to you is reportable in 2019 or 2020?  You will get a 1099R for 2019 if the distribution was considered made in 2019 and if you do the withholding will also be 2019 withholding. For the direct rollover portion to a non Roth IRA, it is less important which year it is reported in, but like the distribution to you, there will be a 1099R (coded G) for the direct rollover if done in 2019.
  • One thing that may help you is that the 10% withholding reflects a distribution not eligible for rollover (even though it actually is). If they thought it was rollover eligible they would have withheld 20%, making it even more difficult for you to come up with the cash to complete the rollover.
  • Note that if you cannot come up with the cash, you can get 60 day rollover relief per Rev Proc 2016-47, reason being “Custodian error” in making this distribution in the first place.
  • Final question – Yes, you have 60 days from receipt of the check to roll it over (and replace the 10% as well), but can get relief if you can’t come up with the 10% within the 60 days.  This is not against any IRS regulations since the check is NOT an RMD. And even if it were a plan RMD, it is not a statutory (IRS) RMD and a non statutory plan RMD is likewise eligible for rollover. 
  • This is yet another consequence of Congress passing major legislation at year end, forcing plans to rush through system upgrades over the holidays. If your situation is any indication, things could get pretty ugly.

Submitted by S Roy on Thu, 2020-01-16 16:24

Thanks for the reply.  TSP classified the payment as RMD for 2020 in their rollover notification (see below).  Looks like TSP will report this as RMD to the IRS.  I am concerned – 1) How I will correct the situation if with IRS in 2020 taxes if I deposit the TSP payment plus the amount withheld as indirect rolloer to the IRA.  2) Should I include the distributon amount in my estimated income to calculate my estimated tax payments for 2020.                                                                Details Regarding Your Withdrawal Disbursement Withdrawal type: Total Account Balance  Date of Payment: 01/03/2020 Withdrawal Breakdown TRADITIONAL Amount paid to you: $ xxxxx  Federal tax withholding: $ xxxxx  Net payment to you: $xxxx Payment method: Check Amount transferred:  Plan trustee/Plan name: VANGUARD  Account number:  Account type: Traditional IRA Except for the amount indicated below as a required minimum distribution (RMD), this payment is considered an “eligible rollover distribution” for purposes of federal income tax withholding. Anytaxable portion of an eligible rollover distribution that is paid directly to you is subject to mandatory 20% federal income tax withholding; this tax withholding cannot be waived. Consult your tax advisor or the Internal Revenue Service (IRS) if you have additional questions about your payment, including the opportunity to roll over part or all of it into a traditional or Roth IRA or eligible employer plan.  000495 GFN1AJA2 000574Required Minimum DistributionRequired minimum distribution amount for        2019: $0.002020: $xxxxx  Required minimum distribution amount satisfied by this payment: $xxxxx  Your RMD amount is considered a “non-periodic payment” for federal income tax purposes. This means that the taxable portion of the minimum distribution is subject to 10% federal income tax withholding. Also, because minimum distributions cannot be transferred to an IRA or eligible employer plan, the minimum distribution will be paid directly to you, or to your checking or savings account, if you so elected. Additional information is provided in the tax notice Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions. This notice is available from the TSP website or by contacting the TSP.    

Submitted by Alan - IRA critic on Thu, 2020-01-16 17:50

  • A 1099R does not flag any distribution as an RMD, and the TSP does not issue Form 5498, so the IRS will not receive anything indicating this is an RMD, and you will not have an RMD for either 2019 or 2020. You should roll over the distribution within 60 days (good if you can replace the withholding) and there will not be any taxable income in 2020 to report, so this will not affect your estimated taxes. Further, since this is a 2020 distribution, there will probably not be a 1099R issued until Jan 2021. But if TSP issues it sooner, it will still indicate taxable income for 2020, so you will not have to deal with reporting the distribution (and rollover) until you file your 2020 return.  I assume that the direct rollover was also done in 2020.
  • I assume that what you posted in bold was sent to you from the TSP. I do not believe that there will be any indication that they are sending a copy to the IRS, but since they are pretty messed up, you should take a close look at this notice for anything suggesting that it would be sent to the IRS. Even if they did send it to the IRS, the IRS knows your age and can easily see that you are not subject to RMDs in 2020 per the Secure Act. 
  • Don’t suppose that there is any possibility that the TSP has entered your DOB wrong, and thinks you reached 70.5 in 2019????
  • Since the TSP is so large, I would expect that there are hundreds of these notices and distributions going out, so it should not be long until they figure out that they have misfired badly, and then they will have to figure out what to advise recipients to do.  But you will be ahead of the game as long as you complete this rollover.
  • Since withholding taken out is for 2020, and this distribution will not be taxable to you if you do the rollover, you can REDUCE your 2020 estimates by the amount of this withholding.

Submitted by S Roy on Thu, 2020-01-16 18:21

Thanks once again.  I feel better and wil go ahead deposit the check plus the 10% TSP withheld. You are correct everything below the first bolded section is from TSP,  just could not get the formatting right (sorry).  TSP has my correct DOB, even by the old rules I don’t qualify until 3Q 2020. I closely looked at the check from Treasury it says TSP disbursement FBO (my name), Any questions call (TSPs numbers), Per Enclosed Mailing Notice.No mention of RMD.  There was no enclosed mailing notice, I assume that’s the notice I posted above.

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