RMD calculation for mid-year pension cash-out/rollover

Submitted by Matt Horne on Tue, 2013-05-07 11:23

The Ford pension plan recently offered a cash-out offer to many of their former employees who are receiving monthly pension benefits. The former employee I work with opted to take the offer and roll it over to an IRA, and on May 1 received two rollover checks: a pre-tax check and a much smaller after-tax check (about 5% of the pre-tax amount). He turns 70.5 this year, and is thus required to take a minimum distribution. After calling the Ford pension they inform him that they keep no records of each individual’s year-end “balance” once they start paying monthly benefits. In this unusual situation, how do we determine balance to correctly calculate his RMD?
1) Do we just use the rollover amount on May 1 as the year-end balance?
2) Do we take into consideration the four monthly payments he already received this year (Jan-Apr) as partial fulfillment of his RMD, and add those amounts with the rollover total to arrive at a ’12 year-end balance…and just assume no growth?
Thank you.



Submitted by Alan - IRA critic on Tue, 2013-05-07 16:29

  • According to the IRS Regs and confirmed by two recent PLRs, there are two choices for RMD calculations in the year a “single sum distribution” is distributed from a DB plan. The easiest calculation is using the amount of the lum sum calculation to be treated as the prior year end balance and the RMD calculated in the usual fashion. See attached: http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.401(a)(9)-6
  • If these checks are direct rollovers and no RMD distributed except the 4 monthly checks, the correct RMD less the 4 payments is an excess IRA contribution and needs to be withdrawn from the IRA as a corrective distribution. Form 8606 should be filed to record the added basis in the IRA.
  • But if the 5% after tax amount was payable to the employee, that amount would obviously more than satisfy the rest of the RMD and employee could roll over the excess balance to the IRA and file Form 8606 to record the additional basis on line 2 of the next 8606 otherwise required. The taxable amount for 2013 depends on how the after tax check is handled with respect to keeping the funds or rolling over the entire amount and adding more basis to the IRA which will be recovered in later years. The gross amount of the 2013 RMD is the same.

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