401K RMD to IRA then back to 401K
A participant in a 401K plan is age 73. Last year he had ownership but sold his interest in the company. Therefore the TPA is informing him he must begin RMD’s. The participant remains employed, but without ownership, with a large salary, his last dollar earned is in the highest tax bracket. In retirement the projections are he will be in a substantially lower tax bracket. He desires to utilize his employed status to delay RMD’s and start RMD’s when he is no longer employed. Here are the questions:
- Can the age 73 participant stop RMD’s after the RMD’s begin and the first year is satisfied due to the control group? In 2025 he is a salaried employee without ownership in any entities in the control group.
If that question elicits a no answer, then the follow up question is:
- Can the participant transfer his account out of the 401K (yes) to an IRA, satisfy the first year RMD requirement, then, stop the RMD via a transfer of the assets back into the 401K? with this strategy, the objective is to “break” the RMD.
He desires to stop the RMD’s while he is a participant and is working and receiving W-2 income. Once the participant becomes retired and goes off payroll, he will be in a substantially lower tax bracket.
The RMD’s will be about $70,000 annually and cost about $26,000 in taxes. By deferring the RMD the tax savings may be in the $8,000 to $13,000 range annually thru his employed years. Rather than ~$26,000 initially the tax due may be in the ~$13,000 to ~$18,000 range.
TPa is informing that question 1 is no, that the RMD cannot be stopped once it begins. We’d like to get third party confirmation of this and strategize the second option if the first answer is confirmed.
Permalink Submitted by Alan - IRA critic on Mon, 2025-01-20 10:51
The TPA is correct.
Apparently, he reached 73 in 2024 and will be 74 this year. As such, he was a >5% owner in his age 73 year, must start RMDs for 2024, and must continue them as the one time test in the age 73 year effectively starts RMDs permanently. The 2024 RMD can be delayed to as late as 4/1/2025, but then there will be two taxable RMDs in 2025.
The answer to both questions is therefore no. If a rollover to an IRA is done any time this year, the RMDs for 2024 and 2025 must be distributed first.
If he had sold his >5% interest in 2023, he would not have been an owner in his age 73 year, and 401k RMDs would not have applied until the year he retired. Perhaps he should consider retirement soon to remove the wages from 2025 income, as he will have two RMDs due this year.
Permalink Submitted by robert Hapanowicz on Wed, 2025-01-22 11:10
thank you for your response. so, the effort of rolling out to an IRA wont “break” the RMD and restart it if/when the assets return to the K?
Permalink Submitted by Alan - IRA critic on Wed, 2025-01-22 15:06
That would not stop the RMD because it’s the same employee and the same plan for which he was a >5% owner in 2024. So even though he is no longer a >5% owner, the plan must treat him as such in the future.
Put another way, once RMDs begin for a plan, they never end as long as there is a balance in the plan, which means if he rolled the balance (less 2024 and 2025 RMDs) into an IRA and then back to the plan, there would still be a plan RMD due for 2026 using the 12/31/2025 balance.
Permalink Submitted by robert Hapanowicz on Thu, 2025-01-23 12:46
Thanks again