RMD for 401K

Submitted by james robertson on Sun, 2018-10-14 09:26

I retired after 40 years with a mega corp in February 2018 at age 71. For some of those 40 years I had over contributed to my 401K, i.e., putting after tax dollars into my 401K after my tax deferred amounts were fully contributed. This money is denoted as Post 86 After Tax and Pre 87 After Tax amounts in my 401K statements and has grown into a sizeable amount over the years. I believe I am not required to include this after tax money as a taxable amount into my 2018 RMD since it is money that was already taxed. I understand that the interest this after tax money has earned over the years is taxable but that the original amounts I contributed (the basis) is not taxable. I have had several telephone conversions with the 401K account holder and seem to get a different story every time I talk with them. I am concerned with getting the proper amount of tax paid due to the severe penalties with paying the incorrect amount. Can you comment on this method of determining the proper 2018 RMD for my 2018 return?

1. Start with my December 31, 2017 401K statement total balance
2. Divide by the appropriate factor from the IRS tables (my wife is > 10 years younger)
3. This will determine my RMD and the amount I must withdraw.
4. To determine the the taxable amount of RMD , I use the December 31, 2017 401K balance subtracting the after tax basis amounts then dividing by the appropriate factor from the IRS tables?

I am concerned the IRS computers will compare my 401K provider supplied RMD statements with my return and flag me for an incorrect return. Is there some better way to address this issue, maybe by moving the after tax basis into a separate ROTH account?



Submitted by Ben Meyer on Sun, 2018-10-14 21:36

  • All determinations of the amount of your RMD and taxable portion will be determined by the recordleeper for the 401(k) plan, based on the information available to the plan, with possibly some options selected by you.  Assuming that the plan records reflect that your wife is the sole beneficiary and is more than 10 years younger than you, the amount of the RMD should be as you describe.
  • Your first RMD year is 2018.  For this first year you can take your RMD by April 1, 2019 if you like.  But bear in mind that you will also have the RMD for 2019, which must be taken by Dec. 31, 2019.  In this case the 2018 RMD will be included in  the account on Dec. 31, 2018, and will count toward the determination of the 2019 RMD.  If you wait until the final RMD date the plan will probably send the RMD around a month before that even if you haven’t requested it.
  • The determination of the taxable portion and the excludable portion of the RMD will also be determined by the plan.  The plan rules may be complex in your case, since you have some pre-1987 contributions.  The plan will send you a form 1099-R in January following the year of each distribution.  Box 1 will show the total distribution, box 2a will show what they have determined as the taxable portion, and they may show the difference as employee contributions in box 5.  These are the numbers you should report for your tax.
  • Depending on plan rules, you may be able to select that the RMD be taken from the pre-1987 balance, until that account is depleted.  Or the plan may take the RMD from the combination of the pre-1987 and post-1986 accounts, or possibly some other way.  The plan should be able to clarify their procedures here.  For distributions from the pre-1987 account, the rule is that your contributions will be distributed first, and then earnings after all contributions have been distributed.  For the post-1986 accounts, the total will be considered as a single account, and the excludable portion will be a pro-rata share of the ratio of post-1986 contributions divided by the total post-1986 balance.  This will all be directed by plan rules, both as described in the plan documents, and sometimes as supplementary internal practices. 
  • If your 401(k) plan has a website that allows you to request distributions, you may able to go through the motions of requesting a distribution of your RMD without clicking on the final screen to activate the distribution.  Along the way the intermediate screens should tell you the accounts from which the RMD will be taken, and also the taxable versus excludable amounts.  You will also see any options you have in making the distribution.  Just be careful to cancel before the final click unless you want the RMD to be distributed at that time. 
  • Since you have an RMD due now, you must take your RMD before you can perform a ROTH conversion.  After you take your RMD, you can take a distribution of the pre-tax and after-tax amounts separately under the terms of Notice 2014-54.  The pre-tax balance will go to a traditional IRA, and the after-tax balance will go to a Roth IRA.  This will also close your 401(k).  You will still have an RMD from the traditional IRA, so consider the trade-offs, including whether you like your 401(k) enough to keep it.  The 401(k) is making you take RMDs that include your after-tax contributions.  If you rollover to a traditional and Roth IRA, your RMD would be based solely on the balance of the traditional IRA. Thus the amount of your original contributions would be shielded in your Roth IRA.

 

Submitted by David Mertz on Sun, 2018-10-14 23:14

The calculation described in 4) for the taxable amount will only be correct if there was no investment gain or loss between December 31, 2017 and the date of the distribution.  The proper calculation of the taxable amount uses the balance on the date of the distribution (before subtracting to the distribution), not the balance on December 31, 2017.

Submitted by Ben Meyer on Mon, 2018-10-15 00:21

Many 401(k) plans actually set the taxable amount for the RMD based on the values on 12/31 when the RMD is determined.  As you look at the taxable and excludable amounts during the year on the plan website, before taking the RMD, they remain the same even though there are gains or losses since the previous 12/31.  Then, when the RMD is taken during the year, the taxable amount is that which was calculated on the previous 12/31.  The IRS seems to accept this methodology, which I have seen on a number of large 401(k) plans.  This method makes it easier for the plan to administer, especially if the participant receives the RMD in a multiple number of distributions during the year.

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