Retire after 70.5 RMD
Thoughts on this scenario? Am I thinking about this correctly?
Client is age 72 and still working.
$1.13m in 401k on 12/31/2011.
He rolled $1.10m to IRA in Feb 2012 (no other IRAs)
Questions:
1) Is there an RMD due from the IRA for 2012?
My initial thought is no since there was no IRA balance 12/31/2011. RMDs from the IRA would begin 2013.
2) If he decided to retire in 2012, would the previous rollover be a problem?
If he retires in 2012, it would cause 2012 to be an RMD year for the 401(k). Consequently, part of the previous IRA rollover would have to be undone because it represented minimum distribution $.
Permalink Submitted by Alan Spross on Mon, 2012-06-18 16:07
1) You are correct. No RMD due unless he is 5% owner OR the plan is one of the few that requires all participants to begin RMDs at 70.5. But if either were the case, the plan should not have included any 2012 RMD in the IRA rollover. No IRA RMD required for 2012.
2) Also correct. If he retires before the end of 2012, then 2012 becomes an RMD distribution year for the plan. However, the amount of the plan RMD was included in the rollover to the IRA. The plan RMD is considered a taxable distribution and an excess regular IRA contribution that must be removed with allocated earnings. This is also rather difficult to report and would require an explanatory statement to document why a direct rollover became partially taxable.
Permalink Submitted by Keith Fenstad on Mon, 2012-06-18 17:03
Thanks!
Quick follow up. Should he retire, must the 401k RMD come completely from the initial rollover? Could the $30K remaining in the 401k plan be distributed outright to him in 2012 post -retirement with any remaining RMD taken as a return of excess from the IRA?
Permalink Submitted by Alan Spross on Mon, 2012-06-18 17:58
The IRS Regs do not include any specific guidance for an eligible rollover distribution that becomes partially ineligible after the rollover due to the employee’s retirement. Therefore, technically the retirement triggered RMD is deemed part of the first distribution/rollover/transfer of the RMD year and the corrective IRA distribution must be based on the RMD included in the initial rollover.
Of course, the IRS does not receive dates of each event, so in many cases reporting the 30k toward the RMD would skate through. The risk with doing that is if and when the IRS finds out about the actual dates of these events which would require a full corrective distribution with earnings, it would be too late to roll the 30k over and the client would be stuck with the taxable RMD, any taxable earnings on the RMD plus the 30k of additional taxable income. While the IRS would probably also grant an exception to the 60 day rollover period due to the overall situation, filing that PLR request adds more expense and waiting.
Permalink Submitted by Denise Appleby on Tue, 2012-06-19 22:30
[quote=”[email protected]“]Thanks!
Quick follow up. Should he retire, must the 401k RMD come completely from the initial rollover? Could the $30K remaining in the 401k plan be distributed outright to him in 2012 post -retirement with any remaining RMD taken as a return of excess from the IRA?[/quote]
If I understand the question correctly, wouldn’t the answer be yes ( i.e. the RMD is already included in the initial rollover and must therefore be taken from it as a return of excess) given that the first distribution always includes the RMD?
I agree with Alan’s statement that says ” the retirement triggered RMD is deemed part of the first distribution/rollover/transfer of the RMD year and the corrective IRA distribution must be based on the RMD included in the initial rollover”.
Permalink Submitted by Robert Corcoran on Tue, 2014-09-02 16:17
I have a similar situation, but with a wrinkle: Client age 70.5 in 2014, is still working and participating in employer’s retirement plan; client also has an IRA from other sources. Employer’s retirement plan permits in-service distributions after age 59.5. If client takes in-service distribution in 2014 (and is still employed as of 12/31/14) and rolls it into the IRA in 2014, how will that impact the RMD for 2014 (if at all)?
Permalink Submitted by Alan - IRA critic on Tue, 2014-09-02 17:57
If client is not a 5% owner, the vast majority of plans do not require RMDs for employees still working at year end. Therefore, a permitted in service distribution does not include an RMD and can be fully rolled over to an IRA. This will not affect the IRA RMD for 2014 from the pre rollover balance, but the additional IRA balance from the rollover will increase the 2015 IRA RMD. The employer plan RMDs in the future will of course be reduced due to the lowered balance in the plan. In other words, if client will continue to work, the RMDs will be increased starting in 2015 because the rollover will increase the IRA balance. But no increase for 2014.
Permalink Submitted by Robert Corcoran on Wed, 2014-09-03 14:14
Thanks!