Is RMD Required before IRA Rollover if over 70 1/2?
[u][b]Facts[/b]:[/u]
At retirement, at age 55, client rolled over his 401k plan to a Traditional IRA. This is clients only IRA or retirement plan.
Client is now 77. His 2011 IRA RMD is $35,000. Distributions so far in 2011 total $25,000 leaving client with $10,000 left to satisfy his RMD for 2011.
Client desires to transfer half the balance of this Traditional IRA (call it IRA 1) to a Traditional IRA with another custodian (call this IRA 2).
[u][b]Question:[/b][/u]
[b]Is it necessary to complete the client’s RMD for 2011 (i.e. distribute the final $10,000) from IRA 1 [b]BEFORE[/b] the IRA transfer to IRA 2 is initiated?
[b][u]Additional[/u][/b]
The client wishes to initiate this IRA transfer ASAP but does NOT wish to distribute the $10,000 now unless it is required. I’m getting conflicting advice on this question. One major custodian says completing the 2011 RMD from IRA 1 before the transfer is NOT necessary. Numerous articles however from major IRA custodians differ. For example, here is an excerpt from a FAQ section of an article from a major custodian:
[i]• Can I transfer or rollover my IRA or other retirement plans, now that I am 701/2?
Yes, however, you may be required to take your minimum distribution before the transfer or
rollover[/i].
Looking for help in trying to resolove this conflict. Thanks.
Permalink Submitted by Alan Spross on Mon, 2011-07-11 22:10
Client can do the IRA transfer to another IRA without distributing the RMD, but ONLY if the transfer is done by a direct T to T transfer. If client takes a distribution, the first 10,000 is deemed to apply to the remainder of the RMD and that 10,000 is not eligible for rollover. The major custodian is therefore correct as long as the funds move by direct transfer.
The problem with the second reference is that by trying to lump qualified plans and IRAs together as well as rollovers with direct transfers, the statement is vague and inconclusive.
Permalink Submitted by Jose Morales on Tue, 2011-07-12 15:44
The thread title asks if an RMD is required before an IRA rollover, but then the actual post discusses a transfer. This is exactly why there is so much confusion, and conflict, when dealing with clients and this issue. The terms “Rollover” and “Transfer” are in no way interchangeable. They have very separate and distinct definitions when discussing how to move funds from one IRA to another.
Rollover: When an client initiates the withdrawal of funds from an IRA, takes receipt of those funds, and then redeposits the funds into an IRA. Must be done within 60 days of receiving the distribution, can only be done once every 12 months per IRA, and must NOT include any mandatory distribution amounts.
Transfer: The direct movement of IRA funds from one IRA Custodian/Trustee to another in which the individual does not take receipt of the funds.
More often than not, a Transfer requires that the receiving IRA Custodian/Trustee send a Transfer Request and Acceptance Letter to the surrendering IRA Custodian/Trustee. It is not unheard of that an IRA Custodian/Trustee will make a check payable to the new IRA Custodian/Trustee with a simple request from the IRA owner without a Transfer Request/Acceptance Letter. It is also not unheard of that those transactions are still coded as distributions because the teller didn’t understand the difference between a Transfer and Rollover, resulting in a 1099-R for the distribution with no 5498 generated by the new IRA Custodian due to their belief that the funds were received as a Transfer due to the check vesting.
Understanding the difference between a Transfer and Rollover is critical in avoiding costly mistakes for your clients. Understanding that far too many people do not know the difference between a Transfer and Rollover is probably even more critical.