IRA transferred to TSP and IRA RMD was not satisfied

Submitted by Sarah Murphy on Thu, 2015-12-03 20:18

Hello,

A woman transferred her IRA from Merrill Lynch to her TSP account in February of 2015. She is of RMD age and is currently taking monthly distributions from her TSP, which satisfy the TSP’s RMD (based on the 12/31/14 TSP value). She did not take any distributions from her Merrill Lynch IRA prior transferring the account to her TSP. As a result, she still needs to take out an additional $4,000 to satisfy the IRA RMD. The TSP is her only remaining retirement account and the TSP’s distribution options prevent her from taking an additional lump sum – the only option would be to liquidate the entire TSP account, which she doesn’t want to do. She spoke with the TSP and they told her they need a letter of indemnity from Merrill Lynch in order to distribute what should have been distributed from the IRA. Merrill Lynch refuses to do so. I know a retirement plan is required to distribute the RMD prior to a direct rollover to an IRA, but is the same required of an IRA custodian when transferring money to a employer plan, such as the TSP? Any suggestions as to what her options are?

Thanks!



Submitted by Alan - IRA critic on Fri, 2015-12-04 00:41

  • No, the IRA custodian is not required to distribute an RMD as that would be inconsistent with the IRA RMD aggregation rules. While quite rare at RMD age, the transfer to the TSP is the same type of direct rollover as a TSP to IRA direct rollover. Both are coded G on Form 1099R and as direct rollovers, but are reportable on Form 1040.  Because a direct rollover is a two part transaction (distribution plus rollover), the same rules apply. Since there was a deemed distribution from the IRA, the IRA RMD was satisfied. While that is good news, the remaining excess contribution to the TSP is problematic as you indicated. A qualified plan has two potential solutions for this. One is to treat the RMD amount as an after tax contribution to the plan, but I do not believe the TSP includes after tax sub accounts. The second is a corrective distribution of the excess and the TSP and IRA custodian cannot get together on that either. Accepting RMD money certainly is an EPCRS violation of some kind and it seems like the TSP needs to act to stay in compliance and eliminate the excess contribution..
  • The TSP does not have particularly beneficial distribution options for the participant or beneficiary options should the client pass. As for the rock bottom expense ratios, the participant can come quite close to those if they use ETFs from major IRA custodians or mutual funds from Vanguard. Generally, unless the participant is still working and contributing to the TSP such that RMDs could be deferred, it is probably not wise to roll over an IRA into the TSP after RMDs begin. Perhaps she should consider a total direct rollover back to the IRA, but that would still require ML to agree to process an excess contribution distribution. This cannot be fully resolved without custodian cooperation. Again, the IRA RMD HAS BEEN taken when the direct rollover was processed, so now the excess contribution is the problem.

 



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