401k in-service rollover immediately before retiring
Client is RMD age but still works, so has not drawn on 403B. Plans on retiring later this year. Can he roll this balance over to an empty IRA right before retiring, thereby avoiding an RMD for 2024? He has been told he can do an in-service rollover and not be required to take an RMD beforehand as he is still working. Therefore does this delay any RMD as to these funds until 2025, when the 12/31/24 IRA balance will include these funds (currently zero)?
Permalink Submitted by Alan - IRA critic on Fri, 2024-07-26 11:57
No, this will not work. If an employee retires in a year that would be an RMD distribution year if not still working, that year becomes an RMD distribution year at the time of retirement. As such, any IRA rollover done in that year prior to retirement includes the RMD and to the extent of that RMD, an excess contribution to the IRA. That excess contribution must then be removed from the IRA in the usual manner.
To be clear, the direct rollover 1099R coded G could not be reported as such, as the amount of the RMD must be reported as taxable income. So would any gains on the excess contribution to the IRA. Therefore, if a “still working” employee plans to retire in that same year, they should wait until post retirement to do the rollover, and the plan would distribute the RMD prior to rolling over the remaining balance. This client got bad advice from the 403b administrator.
More complex variables – because 403b RMDs can be aggregated with any other 403b plans, it’s possible that enough was withdrawn from an older 403b to complete the total RMD for all 403b plans. If that were the case, and the employee provided such documentation to the current plan, then the RMD for the current plan would already have been completed. But this fact pattern is highly unlikely in most cases.
Permalink Submitted by aberdeen on Fri, 2024-07-26 12:26
Thanks for this reply! Same fact pattern (does in-service rollover to IRA), but assume client holds off retiring until January 1, 2025 (not Dec 31). At that point, would the RMD deferral be allowed to 2025?
Permalink Submitted by Alan - IRA critic on Fri, 2024-07-26 12:53
Yes. To be clear, if an in service rollover is done in 2024, because the client will not retire until 2025, the entire rollover is allowed since there is no RMD for 2024.
In 2025, if client retires prior to any distribution, the plan will distribute the 2025 RMD prior to rolling over the balance to an IRA.
If client retires in 2025, even though the RBD will be 4/1/2026, if the 2025 RMD is to be deferred to 2026 no rollover can be done in 2025, since that would trigger the 2025 RMD at the time of the 2025 rollover.