401K and RMD’s
My client has an old 401K from a previous employer. She is turning 70 1/2 this year. She is currently still working part time.
Does the RMD exception for 401K’s apply to previous employers 401K as well? What is the definition of working to qualify for exception. In other words does the client need to work full time, make a certain amount of income to qualify for the exception. What is she decides to retire in the middle of a year does that mean that an RMD is required for that year?
Permalink Submitted by Alan Spross on Fri, 2010-10-08 22:13
With respect to former employer plans, the RMDs begin at 70.5 regardless of work status with other employers.
For the current employer, the first RMD distribution year is the year employee retires. If working limited hours, the definition of retirement for RMD purposes must be defined by the plan document (eg # of hours required). There are a few plans that require RMDs at 70.5 even if still working, but this is fairly rare. Also, any employee that is also a 5% owner or more must start RMDs at 70.5. In cases where retirement falls in a given year, that year is a distribution year, but the required beginning date is 4/1 of the following year.
In summary, the client must take an RMD from the old 401k plan for 2010, but she can defer it until 4/1/2011. In that case, she would have two RMDs due in 2011.
Permalink Submitted by David Byrnes on Sun, 2010-12-12 22:55
What if the participant is more than a 5% owner and has other IRAs? Can he take an distribution from other accounts to satisfy the amount that should have been taken from the 401k?
Permalink Submitted by Alan Spross on Sun, 2010-12-12 23:21
No. Each 401k plan must distribute it’s own RMD and it cannot be satisfied by a distribution from another plan or from an IRA.
IRA RMDs can be aggregated with other owned IRAs, and beneficiary RMDs can be aggregated with other beneficiary account IRAs inherited from the same decedent.
Permalink Submitted by [email protected] on Thu, 2010-12-16 16:12
Alan, I’m running into the same situation – retired employee still has assets in his former employer’s plan. His accountant
calculated his RMD using all qualified accounts ( IRA, 401(k)) and had him take the amount from his lowest earning bank
IRA. Several weeks later he recieved a check from his 401(k) sponsor for his RMD.
What are his options? Thanks for your help!
GC
Permalink Submitted by Alan Spross on Fri, 2010-12-17 03:07
The IRS is fairly lenient in extending the 60 day rollover, but this would require a letter ruling request per p 23 of Pub 590. The fees are comparatively modest and are lower for smaller rollover amounts. But if that avenue is not worth the trouble, perhaps the accountant would agree to settle for the taxes owed on the excess amount distributed from the IRA. This was a pretty basic issue to mess up.
Permalink Submitted by Sean Phillips on Wed, 2011-08-17 14:14
Just a quick follow up to my earlier question. We have a client who was just laid off from her employer (30+ years of service) effective early September 2011. She has a 403B (has not been contributing for a while) and a 401K from this employer. My understanding is that her first RMD from these plans will be required for 2011 but doesn’t need to be completed until April of 2012? Is the 2011 RMD calculation based on the 12/31/2010 value?
Permalink Submitted by Steven A. Solieri on Wed, 2011-08-17 15:09
Ed Slott,
A 72 year-old friend has a Traditional IRA Account with approximately $350,000 in it and she continues to work as a doctor contributing to a 401(k) at the hospital. She has begun RMD (Required Minimum Distributions) for the IRA by April 01 of the year she turned 70.5 years-old. She is not an owner of the business (hospital). She plans on working another 3-4 years (health permitting)
A financial advisor recommended that she transfer the IRA to her 401(k) to avoid the RMD for the next several years while continuing to work thus removing the RMD for that time period. If this allowed by the IRC? What section allows it? Can you assist. Is there anything she may be overlooking?
Please advise!
Steve Solieri
570-840-8567 Cell
[email protected]
Permalink Submitted by mk foss on Wed, 2011-08-17 16:59
An IRA can be transferred to a 401k plan, if the 401k plan accepts IRAs. Nondeductible IRA contributions cannot be rolled into the 401k plan though. This technique works and has been use by many to reduce the tax on IRAs converted to a Roth IRA.
Permalink Submitted by Steven A. Solieri on Wed, 2011-08-17 17:16
IS there a code section that we can point to to ensure that the transfer from an IRA to the 401(k) would not be taxable?
also, can you explain more about how the TIRA to a RIRA would work when subsequently transferred into a 401(k).
Thanks!
Steve
Permalink Submitted by Alan Spross on Wed, 2011-08-17 21:46
Following is Sec 402(C)(8)(B) defining an eligible retirement plan. Sec. 408(d)(1,2 and 3) describes tax free distributions if rolled to an eligible retirement plan. (iii) qualified trust is a 401k plan:
>>>>>>>>>>>>>>>>>>.
(B) Eligible retirement plan
The term ”eligible retirement plan” means –
(i) an individual retirement account described in section
408(a),
(ii) an individual retirement annuity described in section
408(b) (other than an endowment contract),
(iii) a qualified trust,
(iv) an annuity plan described in section 403(a),
(v) an eligible deferred compensation plan described in
section 457(b) which is maintained by an eligible employer
described in section 457(e)(1)(A), and
(vi) an annuity contract described in section 403(b).
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