Rolling over 401k When over 70 1/2

Submitted by John Boyle on Sun, 2015-05-17 18:22

When someone is over 70 1/2 and rolling over their 401k to an IRA, how is the RMD taken? Is the 401k provider required to distribute, or does it get taken after the rollover? Also, is the 401k previous year-end value used as the numerator?



Submitted by Ben Meyer on Sun, 2015-05-17 21:48

  • A direct rollover from a 401(k) plan to an IRA is treated a distribution.  Therefore the RMD for that calendar year must be performed first.  The recordkeeper for the 401(k) plan will usually advise the plan participant regarding the need to take the RMD first.  
  • But you should also watch out for the order of depletion of the various 401(k) sub-accounts.  Prior to separation you may be able to specify whether a distribution is taken from the salary reduction pre-rax sub-account, voluntary after-tax account, employer match sub-sccount, or other possible sub-account.  (Before separation there won’t be a mandatory RMD except for 5%+ owners.)  However, after separation, the choice of sub-account for a partial distribution may be determined by the rules of the plan.  The result in some plans is that the first distributions are from the pre-tax sub-account and are fully taxable if they are not rolled over as a direct or indirect rollover.  This can be obscure, so it is best to ask first.

Submitted by Alan - IRA critic on Sun, 2015-05-17 23:39

  • The prior year end 401k value is used to calculate the plan RMD.
  • Since participants of this age are usually allowed to take in service distributions, occasionally a participant will do a rollover while intending to continue working beyond the end of that year. No RMD is distributed. Later that year the participant changes their mind, is terminated or otherwise retires. This results in the earlier rollover being deemed to include the RMD for the year, but since the RMD is not eligible for rollover, the RMD amount is treated as an excess regular contribution to the IRA and must be removed as such with a corrective distribution to avoid annual excise taxes. While this is not overly costly to correct, it IS a messy situation to report. First, the participant must convince the IRA custodian to make the corrective distribution including allocated earnings. Then, the tax return will not reflect the 1099R issued by the plan since the G coded direct rollover will be deemed to include a taxable RMD distribution since the former direct rollover is segmented into two parts. This will take an explanatory explantion with the tax return so the IRS will understand the reason for the reporting.
  • Since separation from service will be a triggering event for NUA purposes, if a qualified LSD is completed in an RMD year, the cost basis of the employer shares is applied toward the RMD.  

Submitted by John Boyle on Mon, 2015-05-18 03:23

Thank you both for your replies. If the RMD wasn’t taken in the year of the rollover (last year), what steps do you suggest be taken to remedy the situation? Take the RMD this year and ask the IRS for forgiveness?

Submitted by Alan - IRA critic on Mon, 2015-05-18 04:10

When did the person retire from the employer? If not retired by the end of 2014 and not a 5% owner, there is usually no RMD. If there actually was an RMD, the RMD is considered to have been satisfied out of the rollover, but rollover to an IRA must be corrected as described in my prior post. You only ask the IRS for a waiver if the RMD was NOT taken as required.

Submitted by John Boyle on Mon, 2015-05-18 14:54

He was over 70 1/2 and he retired in 2014, rolling his funds over soon after in 2014. Would he have had to take an RMD? If yes, shouldn’t the 401k company have sent it at the same time as sending the rollover check? 

Submitted by Alan - IRA critic on Mon, 2015-05-18 15:50

Yes, the plan administrator should not have included the amount of the RMD in the rollover. Since they made this error, the employee will have to withdraw the amount of the plan RMD from the IRA as an excess contribution withdrawal. See my prior post on how to reporrt all this. The RMD amount will be taxable on line 16b of Form 1040, and any earnings on the IRA excess contribution will go on line 15. Note there is no double taxation.

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