Inherited IRA - Forced RMD from original trustee

Submitted by Brian Pauleen on Wed, 2019-02-20 16:40

We (several family members) recently inherited part of a qualified retirement fund (457, I think). It is non-spousal and the deceased (in 2018) had been taking RMDs (and had taken their full 2018 distribution). When the trustee-to-trustee transfer was executed (2019), the sending company distributed the 2019 RMD. They sent us checks for the RMD and transferred the balance to the new trustee. We read the mice type (after the fact) and it does say they will do that.

The main issue it caused was that we used an Oregon address for the paperwork, but my son will be a full-year California resident in 2019 (he is about to start his first job after college). Oregon tax was withheld. I am guessing he can deal with it next year, but it will complicate his return.

Is it usual for trustees to force you to take the RMD as part of the transfer process?
Any chance the company can recharacterize the RMD as California income? (willing to is a separate question)

Thanks in advance

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Permalink Submitted by David Mertz on Wed, 2019-02-20 18:42

Yes, the 457(b) plan is required to pay out the RMD for the year (2019) before rolling the remainder over to an inherited IRAs because the RMD is not eligible for rollover. (This is a distribution and direct rollover, not an IRA-like trustee-to-trustee transfer.)
Caught early enough, the plan trustee might or might not be willing to change the state. It’s possible that your son will need to file a part-year resident or nonresident Oregon tax return.