In service 401k distribution and RMDs

Submitted by Jana Davis on Wed, 2014-01-22 21:50

Client’s birthday is September 1942
That means he turned 70 ½ in March 2013

But he is still working and has a 401k so did NOT take an distribution in 2013. Client has now decided he wants to do an in service distribution of his 401k to an IRA. And knows this will mean that balance will now be included in all RMD calculations.
The question is, IF we roll the 401k to an IRA this year (by March 2014), will he be forced to take TWO distributions (one by April 1 2014 the other by December 31 2014) or because the 401k was in place at the end of 2013 he will only have to take the regular ONE distribution by December 2014.

The second question – from his employer an old retirement plan was put into an Annuity with Prudential years ago. Prudential has already told client he MUST decide his payment by April 1 of 2014 as he can no longer defer this plan due to his age. Client intends to roll as a lump sum to an IRA. Similar questions – does the balance of this annuity have to take TWO distributions in 2014 since he took out nothing in 2013 the year he turned 70.5?



Submitted by Alan - IRA critic on Wed, 2014-01-22 22:43

  1.  Since there is no IRA balance on 12/31/2013, there is no IRA RMD due for 2014 at all. But he will have an IRA balance on 12/31/2014 so there will be an RMD due for 2015 by 12/31/2015. But client also needs to know that should he retire prior to 12/31/2014 then 2014 will become a 401k RMD distribution year.  But since he distributed his 401k this means that his 401k RMD will actually have been satisfied but the amount of the rollover equal to the 401k RMD will become an excess IRA contribution and will have to be corrected as such, ie withdrawn with any allocated earnings. So if he wants to permanently avoid a 2014 RMD he cannot retire in 2014. With respect to the 401k 2013 RMD, there isn’t one because he worked the entire year and presumably is NOT a 5% owner.
  2. Client should at least consider the annuity payout option, and many of these pension obligations of an employer sold to insurers had to be collected as a life annuity. If the lump sum is elected, the insurance company can clarify if a 2014 RMD is needed and if so they should distribute it separately to him and not include it in the IRA rollover. Once the funds hit the IRA, they are treated exactly like the 401k above. There is no IRA RMD for 2014, but the 12/31/2014 balance will be used to calculate the 2015 RMD.

 



Add new comment

Log in or register to post comments