Stopping RMDs – IRA to 401(k)
Here’s the situation. I have a client who is 74 years old. He does not the income from the RMDs on his $180,000 IRA. He has no other retirement savings and I’m concerned that, later in retirement, he will run out of money before he runs out of time.
He currently owns a small business where he and his “companion” are the only two full-time employees. His Schedule C for 2007 showed about $6,000 of profit from the business. He had an AGI of about $16,000 in 2007. He intends to run the business for the foreseeable future, as long as his health hold up. He’s currently in excellent health.
Would it be possible to have the business open a 401(k) plan which permits participants to transfer IRA assets into the 401(k) plan? My understanding is that, by doing so, beginning in 2009 he would be able to avoid taking RMDs since he would still be working and 401(k)s do not require RMDS – even after 70 1/2 – if the participant is still working.
I understand there may be a few hundred dollars of TPA expenses each year. But that would prevent losing a few thousand dollars in taxes each year. It would also allow the money remaining in the plan to continue to grow tax-deferred; compared to reinvesting the after-tax RMD amount into a taxable account.
Is my thinking correct? Are there any problems with this strategy, in regard to the plan only having 2 owner-employees. Of which only one may participate. He would prefer not to make any contributions to the plan, but could make token contributions if necessary.
Anyone out there familiar with this strategy? Any thoughts or opinions would be greatly apprecaited!
Permalink Submitted by Alan Spross on Thu, 2008-05-29 21:18
The problem with this is that the “still working” exception to the age 70.5 RMD requirement only applies if the taxpayer is NOT a 5% or greater owner. Therefore, he would still have to take RMDs from the 401lk plan which would then include the IRA balance as well if accepted by the plan as a rollover.
Even though he cannot avoid the RMDs, starting a plan will allow him to defer tax on the amount he can contribute to the plan itself, and that could reduce his total taxable income, ie offset some of that RMD income.
With his modest AGI even including the RMDs of under 8,000, it seems he might need most of the money, and if not could invest the RMD in tax efficient investments. It even looks like none of his SS income is included in AGI at this level. Note that there is -0- tax on LT cap gains and qualified dividends through 2010 if he stays in the 15% bracket.