RMD with 401 k

Submitted by Gil Shifrin on Mon, 2017-02-20 16:33

I was still working at the end of the past year. I currently have a 401k with my current employer.I will turned 70 1/2 in 2017. I realize that for 2016 I will not include the 401k dollars in my RMD. In my 401k I have a large amount of company stock (future NUA). If I retire sometime in 2017 do I need to complete my rollover to taxable account to avoid the company stock from being calculated in RMD for 2017?



Submitted by Alan - IRA critic on Mon, 2017-02-20 18:23

  • If you retire anytime in 2017, then 2017 will become your first RMD distribution year, with a required beginning date of 4/1/2018. NUA can be overrated unless your NUA cost basis is quite low. If more than 30% of the value, it is more likely not to be a beneficial option unless you need the money from selling the NUA shares very soon after the distribution of the shares.
  • Another important variable is whether there were after tax contributions made to the plan. After tax contributions can be used to either reduce the taxable cost basis of the NUA shares or the after tax amount can be directly rolled to a Roth IRA, but for any given share you cannot do both.
  • To utilize NUA, you must do a qualified lump sum distribution of the entire balance of the 401k and similar plans (eg ESOP, but no DB plans). The NUA shares must be distributed to a taxable brokerage account in the same year as the other assets in the plan. Both the NUA cost basis and the NUA itself counts toward the RMD. Therefore, if you wait until 2018 to do the LSD, you can probably cover both the 2017 RMD and the 2018 RMD with the employer share distribution. Further, if you work most of 2017 doing the LSD in 2017 which must include the 2017 RMD may increase your tax bill. Delaying the LSD until 2018 may then result in more of an equal amount of taxable income over the 2 years.
  • On the other hand, if you do the complete LSD this year after retiring and elect NUA, the LSD will remove the share value from being used to calculate the RMD for 2018, but not for 2017 since the 2017 RMD will be based on the 401k value on 12/31/2016.
  • Do not start a 2017 LSD after 11/15 since the entire LSD must be completed (employer shares and rest of 401k plan) for the LSD to be valid. This might take longer than a single direct rollover.

Submitted by Gil Shifrin on Mon, 2017-02-20 18:42

Thanks for the additional information regarding NUA. I expect to retire by end of June this year. The NUA cost basis is around $100,000 and the NUA is around $400,000 with share current value around $500,000. Based on your ideas I will execute the NUA and other funds in 401k early next year. This will level out my taxes over the 2 years. I probably will do a large grant to charitable donor fund in 2018 to reduce some more of the taxes. any other thoughts?

Submitted by Alan - IRA critic on Mon, 2017-02-20 20:51

  • 20% of FMV is fairly good and assume that comes from a quote from the plan. You may have 6 or 7 months of salary in your taxable income this year including any unpaid vacation. Therefore, in looking at equalizing taxable income between 2017 and 2018, the relative amounts of your RMDs and other income matter. Did not mention diversification before, but that is more important than tax benefits so you need to determine when you will reduce your stock holdings and incur the cap gain tax. If you want to you do not have to use all the shares for NUA, you could have less than 500k distributed to the brokerage account, and include the balance in the IRA rollover. While most plans use average cost accounting on NUA shares, you should also check if you hold shares with a different cost basis than other shares, in which case you might use the lower cost basis shares for NUA and roll the higher cost basis shares to your IRA. If you distribute all the NUA shares then you have 100k of taxable ordinary income in the year of the LSD. Another option is to determine what your RMDs will be for both years and then do the LSD in early 2018 to include at least as much in shares to cover the 2017 and 2018 RMD. In doing that there would be no additional RMD income to the taxable income for the cost basis of amount of company shares that you distribute to the taxable brokerage account. Even without any after tax contributions in the plan, there is still some serious number crunching you can do here before determining when to request the LSD.
  • Re donor advised fund – Contributions to these funds do not qualify for QCDs. If you want to incorporate a QCD, note that the QCD must come from an IRA after reaching 70.5 to the day. Therefore, unless you already have a TIRA account for which you have a 2017 RMD, you couldn’t utilize QCDs for RMDs until 2019 since the first dollars out of your 401k are deemed to be your RMD and you cannot roll them over to an IRA. If you cover both 2017 and 2018 RMDs from the company stock, even though you can still do a QCD that will have tax benefits, it will probably not be possible to use the QCD for RMDs till 2019. That is another issue at some point – how to best utilize QCDs with or instead of DAF contributions. QCDs do have the advantage of keeping IRA distributions out of your AGI which can help with IRMAA surcharges, and other phaseouts, but you might have to wait till 2019 for the QCDs.

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