RMD beginning date on 401-K to IRA Rollover ?
Client is age 74. Distributions have been deferred as she has been employed. Now in 2008, she (was layed off) and rolled the 401-K to an IRA. Is there a RMD for 2008? I don’t believe that the rinky dink employer / plan administrator gave her any guidence..
Thanks
Scott
Permalink Submitted by Denise Appleby on Tue, 2008-10-07 16:33
[quote=”jodonnell”]Client is age 74. Distributions have been deferred as she has been employed. Now in 2008, she (was layed off) and rolled the 401-K to an IRA. Is there a RMD for 2008? I don’t believe that the rinky dink employer / plan administrator gave her any guidence..
Thanks
Scott[/quote]
It is possible she received the information. Ask her to show you everything she got from the employer, including the forms she needed to sign to get money out of the plan. The information is likely included somewhere in there.
She was due an RMD from the plan for this year (2008). If she did not take the RMD before she rolled over the amount to her IRA, then it means she rolled over her 401(k) RMD for this year and needs to remove it from her IRA as a return of excess contribution. She would need to find out the RMD amount for the 401(k) for this year and remove that amount from the IRA. Her employer should be able to tell her the RMD amount. Any [url=http://www.retirementdictionary.com/nia.htm%5DNIA%5B/url%5Dattributed to the amount must be removed along with the amount from the IRA.
Permalink Submitted by fairira on Wed, 2008-10-08 20:22
Re “She was due an RMD from the plan for this year (2008).”:
I’m apparently mistaken in my understanding till now that if one is employed past age 70-1/2, RMD’s from a 401(k) do not commence till the year after one’s employment ends unless the employer plan requires RMD’s to begin at a given age or in the year employment ends. Is it that the rollover of the 401(k) to an IRA advances the date of the first RMD to the year employment ends?
Permalink Submitted by Alan Spross on Wed, 2008-10-08 23:18
Without the rollover you would be correct about the RBD. However, when a distribution is taken, even as in the case of a direct rollover to an IRA, that distribution occurs in a plan RMD distribution year even though that year is prior to the RBD year. Therefore, the plan must withhold the RMD at the time it releases the direct rollover and it should be sent to the employee separately or not later than year end.
If the plan misses this, and includes the RMD in the rollover, then the RMD is treated as an excess contribution to the IRA and must be withdrawn with an earnings calculation on the RMD amount while it was in the IRA.
This same principal applies to a Roth conversion in the year taxpayer turns 70.5, prior to the RBD in the following year. The conversion distribution is deemed to include the first distribution year RMD and that is not eligible for rollover (Conversion). Therefore, the RMD must be taken out prior to the conversion.
Permalink Submitted by Al Fry on Thu, 2008-10-09 02:25
That is why an employee over age 70 1/2 should never retire at the end of the year. They should always wait until Jan 2.
Permalink Submitted by Alan Spross on Thu, 2008-10-09 03:16
Right. If you retire so close to year end that you cannot get the rollover done by 12/31, then the rollover will occur in the RBD year. That will result in TWO RMDs being withheld, one for the retirement distribution year and the other for the current year if the rollover is prior to the RBD.
If the rollover is after the RBD, the first RMD will already be issued and just the current year RMD will be withheld from the rollover.
Permalink Submitted by TAMMY PICK on Mon, 2008-10-20 17:43
Would the advice remain the same with a 403b? My client retired the day she turned 70 (she’ll be 70.5 this year). We rolled (direct transfer) her Pru 403b into an IRA and assumed that they would take care of the RMD. That didn’t happen.
Since the market has taken the value of the account down, are we OK if we simply take out her RMD based on the 12/31/07 value of her 403b?
Tammy
Permalink Submitted by Alan Spross on Mon, 2008-10-20 19:36
Well, that would be more than enough to distribute, but since there is actually an excess contribution to the IRA in the amount of the RMD, there will have to be an earnings calculation to enable the IRA custodian to code the distribution as the correction of an excess contribution. The calculation will probably be negative, meaning that the corrective distribution will turn out to be less than the RMD.
If the distribution was simply taken as a normal distribution, it would not be clear to the IRS that the excess contribution had been properly corrected, even though a greater amount would be distributed than actually required.
Permalink Submitted by TAMMY PICK on Mon, 2008-10-20 19:58
I’ve never run into this before. How do I, as the advisor, proceed? Is this something that Pru needs to handle or is it something that I can take care of on the Schwab Distribution form? There is a spot for Schwab to calculate excess contributions. And, finally, is the withdrawal of the excess contribution the same thing as her first RMD distribution?
Permalink Submitted by Alan Spross on Mon, 2008-10-20 20:26
The failure of Pru to hold back the RMD does not prevent the RMD requirement from being satisfied, it just results in the RMD being rolled over, which is not allowed. Therefore, the RMD is satisfied, and all you need to do is correct the excess contribution.
Just indicate to Schwab on the Schwab form that Pru rolled over an RMD and the RMD amount of $x must be withdrawn as any other excess contribution using Schwab’s usual forms for correcting excess contributions. Of course, you will have to provide Schwab with the amount of the rollover that would have been the proper RMD amount, and Schwab will have to calculate the negative earnings. Pru is now out of the picture.
Permalink Submitted by TAMMY PICK on Mon, 2008-10-20 20:34
Alan-
Thank you for the insight and guidance.
It’s greatly appreciated,
Tammy