RMD from a DB Plan
A client had a one person DB plan that was closed in April of this year and had the known DB funds (he held them in various accounts) rolled to an IRA. Subsequently, we found that he had other DB holdings that had not been accounted for but which effectively made the DB plan OVER funded.
To mitigate this problem we have a firm that will purchase the overfunded DB plan at a discount after a lot of legal work and other activities are completed. .
The question is this: now that the client is over 70-1/2 and would normally have his first RMD withdrawal due April 1, 2013 (he turned 70 in Dec 2011), MUST he take funds from the DB plan itself prior to the sale (based on the actuary working up the RMD calculations for the DB plan) or can he pull funds from his IRA?
Permalink Submitted by Alan Spross on Wed, 2012-11-28 21:12
I sure cannot comment on exactly what the DB plan RMD should be based on for the 2012 distribution year, but whatever is correct should not have been rolled over to the IRA. The RMD amount needs to be determined and reported as taxable income on the 2012 1040. Then, the amount of the RMD becomes an excess regular IRA contribution and needs to be withdrawn from the IRA as an excess contribution along with allocated earnings. This will require a explanatory statement with the tax return to explain why part of the direct rollover amount on the 1099R is being reported as taxable ( ie it was an RMD).
The rollover negates use of the 2013 RBD for the plan RMD.
Permalink Submitted by Robert Taylor on Wed, 2012-11-28 22:31
I need to get clarity by creating the two parts to the situation:
Part I:
A person is 70 but not yet 70-1/2 and closes out his one person DB plan. Cant he just roll ALL the DB funds to an IRA then begin RMD the following year after passing the 70-1/2 threshold? SInce he isnt yet 70-1/2 it when he rolls the DB I assume he can do so.
Part II
After the above is done an additonal amount of funds to the DB were actually found and are STILL in the DB plan but now the earlier question applies as to the source of funds to pay the RMD. I understnad that all qualified plans operate standalone vs aggregating IRA’s, SEPs, etc…
Permalink Submitted by Alan Spross on Thu, 2012-11-29 00:00
part I: No, any distribution taken in an RMD distribution year including the year prior to the RBD year include the RMD outside of the rollover. This is the same for any plan including a 401k rollover. The direct rollover is a two part process – first the distribution and then the rollover. Since the first part is the distribution, the RMD is included in the distribution if it was not distributed separately at the same time or earlier.
I overlooked the affect of the plan being overfunded. By this I assume you mean that excessive contributions were made that were not allowed to be made under the plan provisions. If so, that should be a separate corrective distribution distributed out of the DB plan to the taxpayer. That balance should not affect the RMD and would not be eligible for rollover. The RMD should be based on the correct plan balance allowed under the plan provisions. In other words, the disallowed overcontribution should be distributed out of the plan using the proper corrective process, the RMD should be calculated on the correct amount and the RMD should have been distributed to the taxpayer as well. The amount ending up in the IRA should be only the allowed plan balance less the RMD.
Is the amount remaining in the plan now the exact amount of plan overfunding?
Permalink Submitted by Robert Taylor on Thu, 2012-11-29 12:29
Yes.. the only funds left in the DB are the over funded. The actuary is currently calculating the RMD amount for this which will be removed prior to the overfunding sale of the assets.
Apparently we incorrectly rolled the known DB funds (leaving out the excess which was not known at the time) to an IRA back in April. Now that this is done, does the ACTUARY have to calculate what WOULD have been the apprpriate RMD based on the DB benefit value since this calculation for DB withdrawal is NOT the same as using the uniform lifetime table amount? What is the resolution of this first issue of rolling over without taking RMD from a DB plan?