RMD for 401(k)?
We have a client who is age 82 and still working. He has a substantial 401(k) balance with his employer’s plan. Since he is still working he has not been required to take any RMDs yet.
Now the employer is selling out to a new business. The employer’s 401(k) plan is terminating. Client has the choice to transfer his existing 401(k) to the new employer’s plan or transfer it out to an IRA. He does plan to keep working for the new employer for now but possibly retire later in 2017.
The question is, if the client transfers the existing 401(k) plan balance to an IRA, will he be required to withdraw an RMD now for this year before he transfers the rest? Or can he wait until next year (2018) for first RMD based on IRA balance at end of 2017?
Thank you,
Permalink Submitted by Alan - IRA critic on Sat, 2017-04-08 00:26
He can roll the balance to an IRA without an RMD based on the presumption that he will not retire in 2017. However, if he then DOES retire in 2017 then 2017 becomes an RMD distribution year. As such the amount of the rollover equal to the RMD will be taxable and that amount will also become an excess IRA contribution that must be removed. His first IRA RMD will be due by 12/31/2018. Therefore, there are various RMD scenarios depending on which year he retires. For example, if he DOES retire in 2017 but does not do the IRA rollover, he can delay his first RMD to 4/1/2018. But if he does the rollover AND retires in 2017, the RMD from the plan will be taxable in 2017 because the rollover is treated as a distribution of the RMD. If all this is not complicated enough, he might own appreciated employer shares in the 401k that would be eligible for NUA treatment. A distribution of such shares counts toward the RMD in the year distributed, so planning options increase geometricly. Normally, the objective would be to avoid having too much income in the same year since that will increase the marginal tax rate.
Permalink Submitted by Arthur Dicker on Wed, 2017-04-12 13:41
Thank you Alan for this answer. I am a bit puzzled however. As I understand it, you are saying that the client can transform retroactively what would have been a straightforward full rollover this year into one that requires an RMD simply by retiring after the rollover takes place and before the end of 2017. Am I reading that correctly?Are you saying that if he plans to retire before year end he should take his RMD from the 401(k) before he rolls it over? I assume that would be based on the value of the 401(k) account on 12/31/2016?Thank you for your help. I appreciate it.Art Dicker
Permalink Submitted by Alan - IRA critic on Wed, 2017-04-12 17:04
Yes, that is correct. If he retires this year, it makes 2017 his first RMD distribution year and the first distribution in such a year is treated as the RMD and to the extent of the amount of the RMD is not eligible for rollover. This occurs retroactively if the retirement comes in the same year, but after the direct rollover. Note that this is more of a reporting hassle than a major cost since he must take the RMD anyway. The hassle is reporting it differently than the 1099R reads since that will still show a G coded rollover which would not be taxable. However, the amount of the RMD which would only be around 4% of the full rollover would have to be reported as taxable and the excess IRA contribution would have to be removed from the IRA along with earnings and the earnings would be taxable. He can avoid this hassle by taking out the RMD first if he knows he is going to retire this year. If he is not sure he will retire but there is a decent chance he will, then he might want to wait before doing the direct rollover until he knows. Further, if he works most of 2017 but will retire late in the year, he may not want that RMD income in 2017 and could defer it to 4/1/2018 which is his RBD. While he would then need to take 2 RMDs in 2018, he will not have any wages in 2018 so this would avoid spiking his tax rate by too much income. To do that, he must postpone the rollover until he wants to take the RMD. Therefore, this takes some planning relative to his RMD options driven by his retirement year.
Permalink Submitted by Arthur Dicker on Wed, 2017-04-12 20:37
Thanks again Alan for this clarification.Art Dicker