Still Working Exception
I have a client who is 75 and has retired in 2021. He has taken advantage of the “still-working exception” thus far. His compensation this year, because of the final check including Severance pay will put him and his wife in the 24% tax bracket. Next year they will probably be in a12% tax bracket. If he delays his 2021 RMD until next year till April 1, he will still have to take his 2022 RMD in 2022 also. So, he would be taking both RMDs in 2022, correct?
I know that you can’t Rollover your RMD, but since we are taking it in 2022, does it still count as the disallowed RMD that can’t be rolled over? And, if so, can we leave enough in the 401(k) plan to satisfy his 2021 RMD, but rollover the remainder? Or, does he have to take his 2021 RMD before we rollover the 401(k) account?
Thank you for your help with this question.
Denise Sowell
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-10 20:31
Client can defer his 2021 RMD as you indicated, but would then have two RMDs due in 2022. Client must complete his 2021 RMD before doing a rollover in 2021, so if the 2021 RMD is deferred, client will have to complete both the 2021 and 2022 RMDs in 2022 before rolling over additional amounts. Any 2022 distribution is treated as first allocable to the 2021 RMD if not yet completed, and then to the 2020 RMD. Therefore, it is not possible to complete the 2022 RMD before completing the 2021 RMD.
Deferral of the first RMD can sometimes be beneficial if the taxable income in the second year will be lower for some reason, even with two RMDs due. This may depend on how late in 2021 the retirement is effective, the amount of severance pay, and of course, how his annual pay relates to his plan balance which determines the amount of the RMD.
Deferral of the first RMD need not be all or nothing. Sometimes partial deferral can work out best, and taxation of SS benefits can a factor. The first RMD year presents some difficult planning challenges, and it is a one in a lifetime situation.
Permalink Submitted by Denise Sowell on Tue, 2021-08-10 20:58
Thank you for your quick response. To clarify, we have to complete his 2021RMD, whether it is done in 2021 or 2022 before we can initiate a rollover. But, if we complete the 2021 RMD in 2021, we can then Rollover the 401(k) and then take the 2022 RMD in 2022 from the new IRA without a problem. Correct?