RMD Required for In-Service Distribution?

Submitted by Ellie Burton on Thu, 2016-11-17 20:04

I have a client who is 77 and still working, participating in her company PSP, not a 5% owner, etc. She is planning to retire Dec 31 this year – will have been employed full time this entire year.

Ahead of her retirement, she processed an inservice rollover to a Traditional IRA. This was processed a month ago and there was no RMD withheld by plan administrator. Also, she did not have any IRA money as of Dec 31 2015, so she was not required to take an RMD for 2016. However, the question is…does she now have to take a 2016 RMD from the IRA given this rollover performed last month?



Submitted by Alan - IRA critic on Thu, 2016-11-17 21:27

  • In general, yes. But the technical details require it to be done differently. First, note that if she is considered retired on the company books on 12/31, 2016 will become a plan RMD distribution year. But not if her retirement is effective later than 12/31. That should be clarified because it makes all the difference in whether 2016 will become an RMD distribution year.
  • Now for the details assuming 2016 will be an RMD distribution year. If the amount of her in service distribution at least equals her plan RMD, she is deemed to have satisfied the plan RMD because the first distribution in an RMD distribution year applies to the RMD. But the RMD is not eligible for rollover and becomes an excess IRA contribution which must be corrected. This requires not simply asking the IRA custodian to distribute the money, but the custodian must understand that the RMD portion of the direct rollover must be treated as an excess regular IRA contribution. It must be returned with allocated earnings for the time in the IRA. The 1099R for the IRA should be coded as a corrective distribution. Only the earnings are taxed.
  • All this is not costly at all, but is a reporting nightmare. The 401k plan should recognize due to retirement that the RMD has been rolled over and issue a 1099R in the amount of the RMD as a distribution and the balance on another G coded 1099R for the direct rollover of the balance. The RMD 1099R should be reported as taxable income on line 16b of Form 1040. The IRA custodian will also issue a 1099R reporting the corrective IRA distribution. Only the earnings returned will be taxable on line 15b of Form 1040. Unless these transactions all conform there will be a mess that will be difficult to unravel. And the 1099R forms may not be issued as they should. I would start by determining how the 401k plan will handle the 1099R, and do nothing with the IRA until that is clarified by the 401k plan.
  • Note another recent thread here “RMD from 401k”. See the last two posts on that thread as it was a similar situation, but it appears that the person took an IRA distribution that was not done correctly.

Submitted by Ellie Burton on Thu, 2016-11-17 22:09

Thank you so much!  This has been so helpful!

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