In Service Rollover – Year of Retirement – Year They Turn 70.5 – RMD Issues?
Facts:
Currently working and contributing to 401(k) at work
Plans to retire August 2016
Turns 70.5 August 1, 2016
Wants to do an in-service 401(k) rollover to a TIRA January 2016
Will still contribute to 401(k) up until retirement in August 2016
Questions:
Because they are retiring in the year in which they turn 70.5, how do they handle their 401(k) RMD?
Does the in-service rollover in the year of retirement in which they turn 70.5 cause an issue with that 401(k) RMD?
Does the in-service rollover in the year of retirement in which they turn 70.5 cause an issue with that IRA?
What potential landmines can this strategy cause?
Thanks so much for your help.
Permalink Submitted by Alan - IRA critic on Wed, 2015-05-13 17:31
The stated dates result in 2016 being the first RMD distribution year, and the first distribution in an RMD distribution year will be the rollover in January. An amount equal to the 2016 RMD is not eligible for rollover and is treated as an excess regular IRA contribution. The excess IRA contribution needs to be withdrawn with applicable earnings to avoid a 6% excise tax. This also causes an ackward tax reporting situation because the direct rollover 1099R cannot be reported as usual since the amount of the RMD will be taxable on line 16b of Form 1040. In addition, the IRA custodian needs to be convinced to process a corrective distribution in which only the earnings on the excess contribution are taxable. To prevent this, if taxpayer is sure of the retirement date, the 2016 RMD should be distributed to the taxpayer before rolling over the rest of the eligible rollover amount. That will eliminate the two issues outlined earlier.
Permalink Submitted by Doug Keegan on Wed, 2015-05-13 17:55
Thanks Alan for the reply.So to be clear, they can:Take their 2016 RMD based on the 12/31/2015 401(k) balance PRIOR to doing the in-service rollover to the IRA.Any additional contributions to the 401(k) will then be rolled over after retirement and will be added to the IRA EOY balance 12/31/2016 for 2017’s RMD.
Permalink Submitted by Alan - IRA critic on Wed, 2015-05-13 18:31
Yes, that is correct. And if client already has an IRA with a 2016 RMD, he should check into deferring his 2016 IRA RMD to 2017 prior to 4/1, since he will not be doing this with the 401k RMD. That might equalize his taxable income over the two years depending on the amount of salary vs. the RMD amounts.