RMD calculation
My client has a 401k of approx. $560,000, $30,000 of which is aafter-tax contributions and is ready to take his first RMD. The administrator of the plan said that the entire $560k is used to determine the RMD. My client thinks that only $530,000 should be used to determine the RMD. What is your opinion?
The client is retired.
Permalink Submitted by Al Fry on Wed, 2008-09-03 17:43
It is based on the entire balance. Is the client still working there?
Permalink Submitted by Carolyn Staub on Wed, 2008-09-03 20:11
The client is retired.
So if the client leaves all the $$ in the 401k and takes RMD each year, the year end total will always include the after-tax contributions – and the after-tax contributions would be the last funds to be distributed. Is that how you see it?
Permalink Submitted by Alan Spross on Wed, 2008-09-03 20:18
No.
The after tax amount would be distributed on a pro rated basis for each distribution. Therefore, a small portion of each RMD would be tax free but most would be taxable.
There is one exception that might apply. If the plan separately accounts for pre 1987 after tax contributions, the client can request that these amounts be distributed separately and up front. They would still count toward the RMD, which is logical since the after tax amounts are also counted to determine the prior year end account balance. It is more tax efficient to check into this to see if these amounts can be distributed first.