$01(k) and RMD

Submitted by Douglas Broome on Wed, 2016-11-30 18:35

I retired in January 2016. I had both Traditional and Roth 401(k) elements within the 401(k) totals because my former employer instituted the Roth option only several years ago, long after starting its Traditional 401(k) plan. My first RMD is due in 2016. The IRA fiduciary (Principal) informed me of the RMD amount due for 2016. I queried the fiduciary as to whether this sum was based only on the Traditional 401(k) portion of my account or whether it was based on the total account balance including the Roth element of the (401(k). The fiduciary responded that the RMD is based on the entire account balance, including the Roth element. On the face of the matter, this does not seem correct. I thought the Roth aspect of 401(k)s and IRAs eliminates the need for RMDs.

FYI, I asked Vanguard about whether they include the Roth IRAs I have with them, along with Traditional IRAs, in calculating the RMD. They told me at the Roth IRAs are excluded from the RMD calculation. USAA said the same thing.

Question: Is the basis for calculating RMDs different for 401(k) plans as contrasted with the basis for IRAs with respect to including or not including Roth sums?

Thank you. Douglas



Submitted by Peter Thomann on Wed, 2016-11-30 19:30

Roth 401(k)s are subject to RMD rules.  To avoid the RMDs of a Roth 401(k) you may want to consider rolling it over to a Roth IRA.  Once rolled into the Roth IRA, RMDs will not apply.  

Submitted by Alan - IRA critic on Wed, 2016-11-30 21:25

Note that if you rolled the pre tax and Roth 401k amounts over to an IRA in 2016, the RMDs for each portion of the 401k should not have been included in the amount rolled over to the IRAs. If the full value of your 401k accounts were rolled over to IRAs, then you have an excess contribution to both your TIRA and Roth IRA which must be corrected. But once Roth 401k money has been rolled into a Roth IRA, RMDs stop starting in the following year, but there was still an RMD on the Roth 401k account for the year of the rollover. To any ANY Roth 401k RMDs, you have to roll the entire balance of the Roth 401k into a Roth IRA PRIOR TO the year you reach 70.5 or the year you retire if later.

Submitted by Douglas Broome on Fri, 2016-12-02 16:54

Thanks for clarification.  I recognize that my RMD for 2016 is based on the 401k total (Traditional and Roth) as of December 31, 2015.  I further understand that I may elect to have all the 2016 RMD taken from only the Traditional (taxable) part of the total 401k, thus leaving the Roth element unreduced by the 2016 RMD.  Is this correct?  The 401k fiduciary (Principal) tells me that, if I roll over the full Roth element of the 401k to a Roth IRA before December 31, 2016, the RMD calculation for the 2017 RMD will be based solely on the remaining Traditional (taxable) portion of the 401k as of the end of 2016.  If this is correct, it means I should save a few thousand dollars when I pay the 2017 RMD.  Do I have this thinking right?  Many thanks.  Douglas.

Submitted by Alan - IRA critic on Fri, 2016-12-02 19:26

Not exactly. The 401k RMD must be calculated and taken separately from both the pre tax and the Roth portions of the account. The 2016 RMD for each portion should not be included in any rollover. The 2017 401k RMD is based on the 12/31/2016 balance so they are correct that if there is no balance in the respective portions of the plan at the end of this year there will be no 2017 RMD due. While you cannot avoid the 2016 Roth 401k RMD, with the rollover to a Roth IRA of the full balance (ex the 2016 RMD), you will have no Roth RMDs in the future since the Roth IRA does not have RMDs.

Submitted by Ben Meyer on Sat, 2016-12-03 07:43

  • There seems to be an interpretation or exception known to 401(k) recordkeepers that permits them to make the distribution as Douglas stated,  solely from the non-Roth 401(k), but with the amount calculated as the sum of the non-Roth 401(k) RMD plus the Roth 401(k) RMD.  This would then be beneficial to the employee since it would leave the Roth 401(k) balance intact, and would also satisfy the complete RMD requirement for that year.  After taking the full RMD in this manner, the Roth 401(k) can be rolled over to a Roth IRA before the end of the year.  Once the funds are in a Roth IRA there would be no RMDs.
  • The justification for taking the combined 401(k) RMD solely from the non-Roth account seems to be based on some obscure interpretations, but they also seem to be well established among several large 401(k) recordkeepers.  I looked into this question some time back and was informed that the explanation can be found in a publication titled “The ERISA Outline Book”, which is a widely accepted authoritative legal reference used by plan administrators and recordkeepers.  The fact that several large plans have been following this approach strongly suggests that it is acceptable to the IRS.

Submitted by Douglas Broome on Sat, 2016-12-03 16:32

Thanks to both for your clarifications.  I gather tfrom them that (1) I may take the entire 2016 RMD (Roth element plus Traditional element) from the Traditional 401k portion, leaving the Roth portion intact.  (2) I further gather than my gambit of rolling the Roth and Traditional 401k elements into Roth and Traditional IRAs prior to December 31, 2016, will keep the Roth IRA out of the 2017 RMD calculation.  Thanks.

Submitted by Ben Meyer on Sat, 2016-12-03 17:43

  • Taking the entire 2016 RMD from the non-Roth (Traditional) 401(k) account is contingent on having the 401(k) recordkeeper or administrator concur that they have setup their system to do the RMD accounting in this manner.  Merely taking an additional distribution from the non-Roth account on your own initiative for the Roth 401(k) would not be sufficient.
  • Yes, you can avoid a ROTH RMD for 2017 by performing a direct rollover of the Roth 401(k) to a Roth IRA before the end of 2016.  You should do it a day or two after taking the RMD to avoid any issues or delays that may arise in the last weeks of the year.
  • Rolling over the non-Roth account to a traditional IRA can also be done if you wish, but the same RMD will be required either way.  Another consideration is the investment opportunities available in the 401(k) plan.  You might also consider not closing out the 401(k) completely, to leave open the potential option of rolling the pre-tax portion of your IRA into the 401(k) at some future date, if your 401(k) plan permits. Fees on the 401(k) may also be an issue.

Submitted by Alan - IRA critic on Sat, 2016-12-03 21:45

  • This reminded me of a prior thread on this issue, posted here:  https://irahelp.com/forum-post/26575-roth-401k-distributed-rmd-roth-conversion
  • Accordingly, I just did a thorough search of all the IRS guidance that should have addressed this question. Was not able to locate anything specific about it, including any conclusions made by people like Natalie Choate. I still think that Grossman’s conclusion must have been based on IRS Reg 1.401(a)(9)-8, which was drafted well before designated Roth accounts. Aggregation of pre tax and designated Roth RMDs raises additional questions including what portions of rollovers are not eligible rollover distributions because they include RMD money. For example 1.408-8 states that when TIRA RMDs are aggregated, a rollover from a single account is only an excess IRA contribution to the extent of the RMD for THAT ACCOUNT not including RMDs for the other accounts. But for qualified plans with a Roth account, it is again not clear if the Roth is considered a separate account for these purposes. The RMD rules must be clear before it can be determined what rollovers are permitted. Most designated Roth accounts accompany pre tax accounts since all matching must go to the pre tax account.
  • Therefore, due to lack of guidance from the IRS and lack of a citation from Bill Grossman leaves us hanging.
  • For Douglas, if you plan administrator believes you can aggregate and acts accordingly, you should take them up on using the pre tax account for your entire RMD because acting on the RMD guidance from a plan administrator is likely enough to waive any IRS excess accumulation penalty for the designated Roth and/or an excess Roth IRA contribution after the rollover. Your only potential concern is that the plan changes their mind and reflects it on the 1099R coding creating an excess Roth IRA contribution.
  • Finally, we need some specific IRS guidance on RMD aggregation and eligible rollover distribution treatment for the direct rollovers.

Submitted by Ben Meyer on Sat, 2016-12-03 23:43

  • According to the Grossman article, the aggregation of RMD across a non-Roth and designated Roth 401(k) can be done only where the designated Roth account has not yet become qualified.  I also can’t find any basis for this interpretation in any IRS sources.  However, several large plans have adopted this approach in the belief that it is correct.  Since a 401(k) plan is required to force out an RMD, and since they do not force out the designated Roth RMD under these circumstances, that should be adequate justification for a plan participant to accept the aggregation as proper and correct.
  • Interestingly, the Grossman article goes on to state the following:  “Further, the participant can opt to have the RMD amount taken from just the designated Roth account once funds are qualified distribution, until they are exhausted.”  This will also be of advantage to the participant, if offered by the plan, since the entire RMD will be tax-free.  But again, this is another obscure interpretation by an industry expert without an obvious basis in IRS sources.
  • The difficulties described by Alan in making an allocation of the RMD in an indirect rollover can easily be avoided.  A participant should take the RMD first, and perform any indirect rollovers afterwards in the same year.  That way the conundrum of allocation would be avoided.  It would be even better to make the rollovers as direct rollovers, so the plan recordkeeper is aware that a rollover is being performed and has an opportunity to enforce any RMD that may have been omitted. 

Submitted by Alan - IRA critic on Sun, 2016-12-04 00:51

Designated Roth 401(k) and Roth IRARoth IRA is not subject to RMD at age 70 ½. Designated Roth 401(k) is subject to RMD rules due to Code Section 401(a)(9).  However, in a 401(k) with designated Roth, the RMD may be taken from just non-Roth account assets until the designated Roth is a qualified distribution amount, although the designated Roth must be included in the calculation of the RMD.  Further, the participant can opt to have the RMD amount taken from just the designated Roth account once funds are qualified distribution, until they are exhausted.

 The above is the referenced paragraph from Grossman’s article. Seems to leave several questions  up in the air. All withdrawals are distributions whether distributed to participant or is a direct rollover. If pre tax RMD is 8k and Roth RMD is 4 k, the first 12k distributed is RMD money no matter where it goes. Under aggregation that 12k can come in any combination from the pre tax account or Roth. Are these options explained to the participant so participant can elect the source of funds?  In this example, Doug would ask for 12k to be distributed to him from the pre tax account, electing taxes over Roth depletion. His former co worker may conversely want to lower his tax bill so would rather have the full RMD taken from the Roth. But the wording above INFERS that before the Roth is qualified, his co worker does NOT have this option. That is not normal aggregation as we know it. Can co worker take ANY amount from the Roth, or just not the entire amount? ……………….Another common situation is a worker doing rollovers early in the year not intending to retire. Then he retires in December making his earlier direct rollover an RMD up to the amount of the total RMD for both pre tax and Roth. Rollovers were done on the same date to both TIRA and Roth IRA. Does the worker have a choice of which IRA contains the excess contribution and how much of each is excess since an aggregated RMD has now been rolled over to two IRA types? So not only is Grossman stating the RMDs can be aggregated, he appears to be coming up with a different form of aggregation rule dependent on taxability of the distribution. That was not the case when an after tax sub account was distributed as part of the pre tax account, since the RMD was unaffected by taxability including NUA. Finally, I think we are seeing why no one else in the retirement industry wants to write about this issue.

Submitted by Ben Meyer on Sun, 2016-12-04 04:08

Yes, it could end up as a real mess under those circumstances.

Submitted by David Mertz on Sun, 2016-12-04 14:43

However, in a 401(k) with designated Roth, the RMD may be taken from just non-Roth account assets until the designated Roth is a qualified distribution amount, although the designated Roth must be included in the calculation of the RMD.

In making this statement, I think that Grossman is indicating an option, not a requirement, providing an example of why one *might* want to choose that a particular account be used to satisfy the combined RMD.

Submitted by Douglas Broome on Sun, 2016-12-04 17:15

The fiduciary for my 401k (Principal) has told me that what I want to do is OK administratively, technically, and legally.  I confirmed this answer with Vanguard and USAA where I have Roth and Traditional IRAs.  It further seems, from this current discussion with Alan and Benn, that my intention is probably acceptable–unless I as a layman am failing to understand their comments.  This thread has likely illuminated one thing:  Initially I had been planning to postpont my entire 2016 RMD until not later than April 1, 2017.  Then I modified this idea to rolling over the Roth portion of the 401k to a Roth prior to December 31, 2016, thus excluding it from the calculation of the 2017 RMD.  I was thinking as well to leave the non-Roth portion of the 401k as is; that is with Principal as 401k.  I would then take the 2017 RMD from the remaining non-Roth 401k before April 1, 2017.  This may be fraught with complications, I now suspect.  I conclude that, if I want to proceed with my desire to exclude the Roth portion of the 401k from the 2017 RMD, I would be well advised to take the 2016 RMD from the non-Roth portion of the 401k first; that is, before doing the rollover of the Roth portion of the 401k to a Roth IRS.  Thus:  take the entire RMD in early December 2016 and a few days later–still in December 2016–do the Roth 4012k portion rollover into a Roth IRA.  This means taking the entire 2016 RMD in 2016, not in 2017 before April 1.With respect to my particular issues, I would welcome learning how the concept of “qualified” Roth distribution applies.  Thanks everyonew for educating me about this matter.  Douglas   

Submitted by Alan - IRA critic on Sun, 2016-12-04 18:30

  • For purposes of the vague rules interpretation it should not matter if you defer your 2016 RMD to 2017. The normal issues would be the ones that would affect this decision, ie would having two taxable RMDs in the same year be beneficial or not? Whether you defer or not, you need to fully complete the entire RMD for both sections before doing a rollover, otherwise you would be rolling over RMD money. Every year the plans stays in place the rollover must only be done after the RMD is fully completed for both sections. If a plan administrator indicates acceptance of the aggregation rules between the pre tax and Roth, then a rollover from either section can only be done after the total RMD is completed.
  • I wish to qualify my prior recommendation to take advantage of this interpretation. I still think you should, but only if there is a meaningful tax benefit of taking disproportionate RMDs from the two accounts. The reason is that you have no control if the plan is audited and EPCRS happens to disagree with the interpretation. If they do, the plan must take corrective measures and you would have no input on those measures. If the plan ever alters the 1099R coding due to an EPCRS audit, it would lead directly to an IRA excess contribution and could affect more than just one year.
  • Re your question, the designated Roth becomes “qualified” after 5 years and reaching age 59.5 and all distributions are tax free thereafter. This does not affect the amount of the RMD for the Roth portion, however the observations of DMx make good sense regarding that the qualified Roth issue is just an example of one possible option of aggregating. For there to be conditions beyond the usual rules of aggregating makes no sense. As for your aggregating choices, the two prime determinants should be whether you want more or less taxable income in the current year with. Taxes on Roth earnings end fairly soon upon qualification so it makes sense to avoid those taxes if you can. Qualification would not be a factor if your Roth has no gains, but the other factor is how much of your Roth you want to preserve for the future. This is similar to a conversion decision, ie do you want to have less in your TIRA and more in your Roth? 

Submitted by Douglas Broome on Sun, 2016-12-04 22:52

Alan, Thank you again.  Very helpful.  My overarching goal is/has been to preserve the Roth monies intact, and earning tax-free, for as long as possible.  I do not foresee needing to access the Roth funds possibly ever.  I am fortunate to have enough pension and social security, plus Taditional IRAs and regular investments, to cover my and my spouse’s needs, given our ages.  The only reason I wanted to defer the 2016 RMD to 2017 is because I calculated that doing so would not propel me into a higher tax bracket in 2017.  Reverting this 2016 RMD to being paid out in 2016 will not have large financial consequences for me, only minor ones.  For this reason and avoiding any possible mixups and consequences of auditing, I think the safe thing to do is take the 2016 RMD a few days prior to executing the rollover of the remaining non-Roth 401k and the Roth 401k element to non-Roth and Roth IRAs in December the current month.  I therefore need to get started now with the 2016 RMD.I believe I have had the Roth 401k under my employer’s plan for five years.  Therefore it must be “qualified.”  I must check for certain.Does the need to have had the Roth 401k for five years apply to each Roth 401k plan, or does the calendar counting begin only with the first Roth 401k plan?  The same question arises with respect to Roth IRAs:  Does each Roth IRA have its own five-year calendar for becoming “qualified,” or does the calendar counting begin with the first Roth IRA I start?  What happens to the five year counting to become “qualified” when I move a Roth IRA from one fiduciary to another either before or after five years?FYI, my former employer is a small nonprofit association with a total 401k plan value of under $5 million.  I would think that it is hardly audit bait.  From my knowledge of the people involved, I am confident they have been doing everything as right as possible and not trying any questionable maneuvers.Thank you again.  Douglas 

Submitted by Alan - IRA critic on Sun, 2016-12-04 23:22

Douglas, the 5 year aging period for a Roth IRA begins with the first Roth IRA contribution to any Roth IRA. Changes of any kind after that do not change the first contribution year. Unlike a Roth 401k, for a Roth IRA your earnings always come out last. The Roth 401k balance rolled into the Roth IRA will be qualified, so will be treated as regular Roth IRA contributions once in the Roth IRA. That means the amount you rolled in to the Roth will be available without tax or penalty anytime you wish. Roth IRA earnings will not be tax free until 2021 but they will be a small portion of the account. 

Submitted by Douglas Broome on Tue, 2016-12-06 16:17

Thanks, everyone for helping through this thicket.  To sum up, I conclude the following:  (1) I am well advised to  take my 2016 RMD from the non-Roth (pretax) portion of the 401k immediately; meaning, prior to rolling over the Roth portion of the RMD to a Roth IRA.  (2) That way I eliminate any possible problems resulting from doing the Roth rollover this year (2016) and then taking the 2016 RMD from the non-Roth (pretax) portion before April 1, 2017.  This is OK with me because the amount of 2016 RMD money involved, and the derived tax consequences in 2016 and/or 2017, from the 2016 RMD is vastly insufficient to warrant complicating my life if the vague rules should come to bite me via an audit, a misinterpretation of rules, or a misunderstanding in general.Please let me know if I am thinking correctly or not.  Douglas

Submitted by Alan - IRA critic on Tue, 2016-12-06 17:05

That is correct. Just as a precaution, if you have any printed material indicating that the plan administrator states that the TOTAL RMD for both parts can be taken solely from the pre tax portion, I would keep a copy of that documentation in the unlikely case where this ever becomes an issue.

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