401K/403B REQUIRED DISTRIBUTIONS

Submitted by GREGORY SIMMONS on Tue, 2018-11-06 14:04

CLIENT AGE 85, HAS NVER WITHDRAWN FROM HER 401K/403B AS SHE HAS ALWAYS BEEN EMPLOYED BY PLAN SPONSOR. THIS YEAR SHE STOPPED GETTING “PAID INCOME” HOWEVER SHE IS STILL ON ‘BOOK’S” AS SHE GETS HEALTH CARE BENEFITS.

SINCE SHE HAS NO “INCOME” I THINK SHE MUST W/D FROM HER 403B. IS THAT CORRECT?

AS AN ASIDE HOW MUCH “PAYROLL INCOME” WOULD SHE NEED TO SHOW TO CONTINUE TO BE ABLE TO DEFER HER 403B?

THE RMD IS SIGGNIFICANT ABOUT $80,000 SO THIS IS IMPROTANT.

THANK YOU.



Submitted by Alan - IRA critic on Tue, 2018-11-06 15:15

  • SInce there is no specific definition of “retired”,  the IRS mostly relies on the employer requirements for determination. However, if client’s status is still active while not earning anything, this suggests that the plan is failing to handle their requirements under Sec 401(a)(9) properly. Whether client receives other benefits such as health insurance is not a factor.
  • Starting at 70.5, every year that RMDs can be deferred concentrates those RMDs over fewer years as the divisor shrinks and the plan balance grows.  If client has little taxable income this year, she should be withdrawing from the plan to take advantage of the lower tax bracket, ideally withdrawing what the RMD would be. If she takes the position that it is really an RMD, she must complete it before doing any Roth conversions, however if she chooses to simply convert for long range planning purposes it would be wise to do to reduce the buildup of RMDs if the plan discovers an error or simply because the RMDs are now concentrated into fewer years.  Her beneficiaries will also have larger RMDs if they inherit this plan instead of amounts already taxed and saved in a taxable account. In other words, she is probably better off taking distributions to level out her taxable income over her remaining years which means avoiding any very low income years like this one.  However, I think the plan’s accounting is suspect and if the IRS discovers this, it is hard to predict what would have to be done to correct the problem in addition to starting RMDs for affected employees immediately.

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