Rollover of 50% of my Employer Retirement Funds
into an IRA after Age 70-1/2. My Employer insists on paying out the RMD based on the total in the fund on 12/31/10. However other funds in the account on which tax has already been paid on they are only distributing 50% of that and the remainder is staying in the 50% that remains in the fund. I will be receiving monthly payments from the retirement fund and it seems to be that those distributions should satisfy the RMDs amounts for this year and probably subsequent years. It is my contention that they should be only cashing out the portion of the RMD based on the 50% I am rolling over into an IRA.
I am concerned because if they cash out the whole amount that it will drastically increase the taxes I would have to pay for 2011 as I also have a deferred Compensation Plan on which I have to do an RMD withdrawal on for this year too. I have searched much of the IRS Publications and nothing is mentioned that I can see regarding that situation. My plan is doing some research on this issue too but haven’t reached a final decision as of yet. It would be helpful if I could get ones perspective on this ASAP.
Thanks,
Shirley
Looking forward to receiving some favorable results. Wish I had been able to find this forum earlier as the distributiions are about to happen.
Added Comment: How do I go about changing my user name??????
Permalink Submitted by mk foss on Wed, 2011-05-11 17:16
The plan documents are often more restrictive than the IRS rules. Some of the large employers in my area require an RMD first – supposedly to protect the employees from the 50% penalty. In any case, if you have after-tax money in the retirement plan, not all of the RMD will be taxable.
Permalink Submitted by Shirley Hall on Wed, 2011-05-11 18:04
Do you mean to say that the portion they pay out that has already been taxed could be considered part of the RMD and they would not have to pay out the total RMD but perhaps the difference between the RMD total and the amount distributed that was already taxed?????????
Permalink Submitted by Alan Spross on Wed, 2011-05-11 19:00
The portion of your plan balance that is from after tax contributions is not taxed again and comes out pro rated with the pre tax dollars. For example, if 10% of your balance is after tax, an RMD or other distribution will be 10% tax free, and the tax free portion counts toward your RMD just like the pre tax amount.
Any distributions from the plan are considered to be applied first to your RMD. Therefore, if you took out your RMD amount before the rollover, then the RMD would be satisfied and no further RMD withheld from the rollover. On the other hand, if you want to do the rollover first, then the RMD they withhold and pay to you should be able to replace some of your monthly distributions. So this is a matter of timing, ie when you take the monthly distributions vrs when you do the rollover. Of course, you have to figure how much of your expenses will be covered by the RMD you receive. If the RMD is smaller, you should be able to reduce the monthly distributions such that the total you receive is what you need.
Another option is to figure out your expenses and then determine what the after tax amount is. You can have the plan roll the pre tax amount over to an IRA and send you a check for the after tax amount. The after tax amount counts toward your RMD and will of course be tax free as well.
Permalink Submitted by Shirley Hall on Wed, 2011-05-11 20:41
Hmm, this is getting more complicated. Actually I received my first montly payment from the retirement funds the beginning of this month that represents money received for the period from March 15, 2011 through the month of
Apri. The rollover and the RMD will probably be done sometime this month probably at the same time. Hopefully if the funds that they are paying out on funds that were already taxed can be considered as part of RMD distributed then they won’t have to pay out the full amount based calculated in additional cash over the taxed amount but just pay out the RMD total less the amount they are paying out of the funds that had been previously taxed.
Shirley
According to the Pension Plan information I received when you over 70-1/2 and no longer employed they have to take out an RMD but since they are rolling over 1/2 of the fund money into a direct rollover they cannot rollover the RMD portion but I am not rolling over 100% of the contriutions I made but only 50% so it seems to me that 50% of the RMD can be paid out in cash to me but the other 50% remains in the retirement fund for distribution later in their payouts to me. They did split the amount I have in the fund that was contributed tax free and allocated that I can claim an amount as tax free for 160 months, the other portion is given to me in a lump sum payment and I sure have to do some investigation as to how this income is handled.
Permalink Submitted by Alan Spross on Wed, 2011-05-11 23:09
The amount they withhold from the rollover for your RMD depends on how much the plan has already distributed this year. Your first payment is credited against your RMD and the second will also if issued before the rollover or along with it. You would have to know the amount of the RMD vrs the amount of those two distributions to see if your full RMD had been satisfied or not. If not, the remainder must be withheld from the rollover amount.
Once the rollover is done, are all the funds out of this account and in an IRA?
OR……………., is this a defined benefit pension plan that perhaps purchased an annuity from the plan and you are getting a life annuity on that portion, while the rest of the plan can be distributed as a lump sum distribution which is the only portion you can roll over? That could change things depending on how accounts within the plan were set up. In that case, the plan administrator would have to clarify this for you as well as which part the after tax contributions were allocated to.
Permalink Submitted by Shirley Hall on Thu, 2011-05-12 00:14
I believe that the plan is a defined benefit plan as it comes from a city government plan which is a combination of my contributions plus interest as well as the City’s contributions. The plan allows a rollover of 50% of my contributions plus interest earned on those contributions or 100% of those contributions plus interest so I understant. 50% of my contributions are added to the account to determine the annuity amount payout based on years of service, age and 60% of my earnings based on the highest 24 months of earnings. I have received one distribution of the monthly amount calculated for 1 and 1/2 months. The next distribution doesn’t come until the end of May.
Only 50% of the funds are to be rolled over to the new IRA less what they take out for the RMD and 1/2 of the amount they give us back of funds on which taxes were previously paid. Sure wish I could find some concrete written rules on this issue.
Shirley
Permalink Submitted by Alan Spross on Thu, 2011-05-12 00:26
Whether the annuity is your choice or mandatory, the fact is that only 50% is being rolled over. You will not find specific IRS Regs on this situation and will have to go by what the plan indicates to be your RMD and where your after tax contributions are being credited so you do not pay taxes twice.
Typically, if you are taking a life annuity, for years after this year, the annual payout by definition IS THE RMD for the annuity. The rest of the balance will be an IRA and the RMD based on the usual RMD rules. But you need to find out where your after tax contributions are being credited. If any of them go to the IRA, then you need to file an 8606 on your IRA accounts to enable your IRA RMDs to be partially tax free. If the after tax amounts are allocated to the annuity, then each year you will get a 1099R from the insurance company showing the taxable amount as less than the gross amount.
The confusion is then limited to 2011 with respect to how the RMDs are handled, and for that you will have to depend on the plan to get it correct and explain it as best they can. Anything they consider to be an RMD is NOT subject to mandatory 20% withholding, but you can request withholding if you want it.