IRA transfer to 401(k) before satisfying RMD

Submitted by Sarah Murphy on Thu, 2023-10-26 16:18

Hello,

I have someone who transferred his entire IRA to his 401(k) before satisfying his IRA RMD. Can this be corrected by simply transferring enough money from the 401(k) back to the IRA, then taking the withdrawal from the IRA to satisfy the RMD? Or does the transfer from the IRA to the 401(k) somehow have to be unwound?

Thank you in advance for your help!



Submitted by Alan - IRA critic on Thu, 2023-10-26 17:05

  • Technically, the direct rollover from the IRA is a distribution which includes the IRA RMD, and a rollover of the RMD to the 401k. This creates an “excess amount” in the 401k, which requires a corrective distribution for which most 401k plans do not seem to provide a clear process including 1099R reporting. This is the same messy issue that exists when IRA basis (Non deductible contributions) are rolled into a 401k. 
  • To be clear, the IRA RMD has been satisfied, but that means reporting the G coded 1099R differently than issued, showing taxable income to the extent of the RMD. The problem is that the 401k corrective distribution should be non taxable (except for small gains in the 401k), so the 1099R from the 401k should not show the entire corrective distribution as taxable, thereby avoiding double taxation. So this is more of a tax reporting issue problem than an additional tax amount problem. Most taxpayers that make this error, either with RMDs or IRA non deductible contributions encounter problems on the 401k end.


Submitted by Sarah Murphy on Fri, 2023-10-27 11:40

Alan, thank you for your response, but I’m still a bit confused.  Two articles on irahelp make it seem as if the RMD isn’t considered to be satisfied when a direct transfer is made.  For example, this article Clarifying the Rollover/Transfers Rules When an RMD Is Due | Ed Slott and Company, LLC (irahelp.com) states: “However, if you do a direct (trustee-to-trustee) transfer (that is, the funds are paid directly to another custodian) instead of a 60-day rollover, the rules are different for IRAs and plans. If the transfer is from an IRA, the RMD does not have to be distributed before the remaining amount can be transferred. But you would still have to remember to take the RMD by the end of the year from the new IRA.” And the article RMDs and Rollovers – A Dangerous Blend | Ed Slott and Company, LLC (irahelp.com) states:”How the money moves matters. If an IRA owner does a direct transfer (whereby the IRA is sent directly from one custodian to another), the RMD can travel along with the transfer. However, if the same person originally chose to move the IRA to the new custodian via a 60-rollover, the RMD amount cannot be included in the amount that is rolled over. It must be retained by the account owner.” Is there a difference when the direct transfer is from IRA to IRA versus IRA to Plan? For example, when it’s IRA to IRA, the RMD can travel to the new IRA and then be distributed from the new IRA. But if it’s from an IRA to a Plan, the RMD cannot travel to the the plan and is therefore considered to be distributed?  I really appreciate your help. Thank you!



Submitted by David Mertz on Fri, 2023-10-27 13:03

Your references are to the movement of an IRA to another IRA by direct trustee-to-trustee transfer (per IRS Revenue Ruling 78-406) which is a nonreportable transfer, not a distribution or a rollover.  On the other hand, movement of funds from a 401(k) to an IRA [or vice versa] must be done by a reportable distribution and rollover, whether done directly or indirectly.   Because this involves a distribution from the 401(k), the RMD is part of that distribution and is a part that is ineligible for rollover.  Depositing that portion into the IRA therefore becomes an excess contribution to the IRA.  (A 401(k) is not an IRA.)



Submitted by Alan - IRA critic on Fri, 2023-10-27 14:11

Note that while this direct rollover was from an IRA to a 401k, the explanation above by DMx remains applicable to this direct rollover in the same manner as if this had been a 401k to IRA direct rollover. The Slott article links all refer to IRA to IRA non reportable transfers which are not distributions and therefore are not RMDs.



Submitted by Sarah Murphy on Fri, 2023-10-27 14:26

Last question, I promise. Considering a direct IRA-to-plan rollover is reportable, you would think the IRA custodian would be required to distribute the RMD first like a plan is.  I guess that’s not the case?  Thank you!!



Submitted by Alan - IRA critic on Fri, 2023-10-27 14:47

Right, it’s not the case due to the IRA RMD aggregation rules which allow the RMD to be completed from any owned IRA.  An IRA custodian has no idea whether the RMD may already have been completed from another account with a different custodian. 403b plan RMDs are subject to the same RMD aggregation rules, but most 403b plan administrators will separately distribute the RMD unless told by the participant that the RMD has already been taken from another 403b. For an IRA direct rollover the taxpayer is expected to know these rules and IRA custodians rarely even warn the taxpayer that a portion of their direct rollover to a qualified plan would actually include their IRA RMD for either that IRA or for any other IRA to the extent that the total IRA RMD had not already been completed.



Submitted by Sarah Murphy on Fri, 2023-10-27 14:56

Thank you so much. I truly appreciate the information!



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