RMD - Current working 401k but rollover to IRA

Submitted by Steven Goodell on Thu, 2022-02-10 23:29

Greg is still working at his employer and turned 72 in 2021.
In June of 2021 he rolled over PART of his 401k to an IRA.
Let’s assume that the 401k was 1 million on Dec 31st 2020 and he rolled over 800k on June 1st 2021.
He did not take an RMD in 2021 and will take his 2021 RMD before the April 1st deadline.

The amount that stayed in the 401k – no RMD for 2021

Question – How do I calculate what the value of the IRA was on Dec 31st 2020 for the RMD calculation.
Is it a pro rata calculation based on what he took out?
Value of the IRA when he first rolled it over?

THANK YOU!

Flag as spam

Permalink Submitted by Alan - IRA critic on Thu, 2022-02-10 23:49

If Greg had no value in IRA accounts on 12/31/2020, there is no 2021 IRA RMD despite the 401k rollover in mid 2021. Of course, the 12/31/2021 IRA value will be significant leading to a 2022 IRA RMD. Depending on when he is planning to retire, he could have delayed RMDs on the 401k balance until the year of retirement. I assume that he is not a >5% owner of the employer and therefore will not have a 401k RMD until the year he retires.
Since he had no IRA balance at the end of 2020 and no 2021 RMD, there is no IRA RMD to defer to 4/1/2022.

Permalink Submitted by Steven Goodell on Fri, 2022-02-11 17:11

Great information!He is a over 5% owner. He owns 50%. I am completely unfamilar with how that affects anything related to his RMD. Could you shed some light on that.

Permalink Submitted by Alan - IRA critic on Sat, 2022-02-12 03:42

If he was a >5% owner in 2021, then 2021 is an RMD distribution year for the 401k, therefore my prior reply is no longer applicable. The first 401k distribution was the rollover of 800k, and if the RMD was 39k, then 761k was the allowed rollover amount. The 39k must be reported as a taxable distribution and since RMDs are not eligible for rollover, Greg needs to determine the exact RMD amount and advise the IRA custodian that it must be treated as an excess regular IRA contribution and returned with allocated earnings. The amount of earnings returned will be taxable in 2021 along with the 39k estimated RMD, and he will get a 1099R in Jan 2023 coded to show the earnings portion as taxable in 2021. Obviously, since his 2021 401k RMD was completed, there is no portion left to defer to 2022. This is not costly, but because his tax return will have to deviate from the 1099R, he will have to include an explanatory statement with his return regarding what occurred. As such his tax filing will be more difficult.