Correct procedure to rollover 401K to IRA after age 70 1/2

Submitted by Joseph Costantini on Sat, 2014-06-14 18:51

I will turn 70 1/2 in October this year. I have an established IRA, and also a 401K that I will continue to contribute to as long as I continue to work. I understand that I am required to begin taking distributions from my IRA when I reach 70 1/2.

My question is, should I directly roll over my 401k into my IRA, a portion of my 401K into my IRA, or none of my 401K into my IRA; and how do distributions work in each case?



Submitted by Alan - IRA critic on Sat, 2014-06-14 22:45

AS long as you are not a 5% owner of your employer, you do not have to begin RMDs until after you retire. You can roll amounts out of the 401k as permitted by the plan, but then you would have to include your higher IRA balance at year end to determine the following year IRA RMD. If you want to reduce RMDs while you are still working, do not roll out of the 401k. Your 2014 IRA RMD can be taken this year or deferred in part or in full to no later than 4/1/2015. Whenever you retire, that year will become an RMD distribution year for the 401k, but you will have a similar choice for the 401k as you do for the IRA in deferring all or part of your first RMD. Generally, you would want to use your choices to even out your taxable income each year.

Submitted by Sharon Lund on Fri, 2014-06-27 23:39

To continue on with the conversation of what options are available to workers over age 70.5 who are still working and have access to a 401(k) or 403(b)….. I have a client, age 75, who is professor and not a 5% owner of his employer (a university) and is, therefore, not currently required to take any distributions.  He currently has no IRA’s, just a very large 403(b) and some money in a taxable account.  The thought was to recognize income to the top of his current 25% tax bracket each year (i.e., $89,350 for filing status single) while he is still working by initiating a partial conversion from his 403(b) directly to a Roth IRA each year and paying the tax owed from his taxable account.  (If he ever does retire, he will be in the same 25% bracket anyway.) The thought was that if he converted a bit each year, he’d have a kitty of money growing tax-free that he could tap without bumping himself into a higher bracket if he ever required a large lump sum in any year down the road (e.g., for medical). From everything I’ve read, my understanding is that 100% of the 403(b) conversion could go directly into a Roth IRA via an institution-to-institution direct transfer, without the distributing institution needing to issue an RMD first.  Is that correct?  Also, since he has never had a Roth IRA, the growth in his new 2014 IRA could not be withdrawn tax-free until 2019.  Is that correct?

Submitted by Alan - IRA critic on Sat, 2014-06-28 03:24

  • Yes, you are correct on both counts. In the year he retires or cuts back to the point he is considered retired by the plan, any distributions in that year are applied to the RMD for the first distribution year. Therefore, the direct rollovers to his Roth IRA could become troublesome excess contributions if he retires in the same year. so perhaps he should not do these direct rollovers until late in the year when he is sure he will not retire in that year. Also, note that these direct rollovers can still be partially or fully recharacterized if he has experienced losses in the Roth or otherwise does not like his tax bill. Finally, since he is now 75, he can forget about the pre 1987 accruals in his 403b that were not subject to RMDs until age 75.
  • He can withdraw tax free from his Roth right away up to the rollover amount. Any additional amounts are earnings and they do not become tax free until 2019.

 

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