RMD from 401(k) as 60-day rollover to IRA

Submitted by Shane Hall on Wed, 2019-10-23 18:53

I have a client that is 72 years of age and retired from his employer in April of 2019. He had a sizable 401(k) plan and several Traditional IRA. Knowing that he was to retire in April, I advised him not to roll his 401(k) plan to his IRA until after 1/2020 to prevent having to take an RMD on the 401(k) plan due to his employment during this year. He inadvertently rolled his 401(k) plan to a new IRA within his 401(k) plan administrator–Empower. He did this electronically by accident. Empower properly required an RMD on the 401(k) and distributed said RMD prior to moving his funds to the Traditional IRA. Once he learned of what happened, he called Empower to see how he could fix this. Empower told him that he could do a 60-day rollover of the RMD funds and put the money back into the Traditional IRA. He did so. I do not believe that is permissible, as that would defeat the purpose of RMD, and he will be double-taxed on those funds upon a future distribution from the IRA. Can anyone confirm that an RMD from a 401(k) is not allowed to be rolled into a Traditional IRA? Any help would be greatly appreciated.



Submitted by Alan - IRA critic on Wed, 2019-10-23 19:26

  • You are correct. The 401k RMD that was triggered by the rollover to an IRA is not eligible for rollover and Empower was incorrect in suggesting that it could. This rollover created an excess regular IRA contribution, which must be corrected in the usual manner to avoid a 6% excise tax every year. The corrective distribution must include allocated earnings on the excess amount and the earnings will be taxable in 2019, the year is which the excess contribution was made. Client should complete the excess removal before year end so the amount of the distribution will not be in his 12/31/2019 IRA balance, thereby increasing his 2020 IRA RMD. Client also cannot count the excess removal as part of the 2019 IRA RMD. 
  • Once corrected, this error will not be very costly, but is a hassle to explain to the IRA custodian why a rollover is an excess contribution, and may also be a hassle to report on the tax return. There will be two 1099R forms from the 401k plan, one for the direct rollover (Coded G and not taxable) and another for the RMD distribution (coded 7). The 7 coded 1099R is taxable income because it was a plan RMD, and the rollover should not be reported as offsetting the tax on that RMD. The 1099R from the IRA custodian for correcting the excess contribution should only show the gains as taxable earnings in Box 2a. Whoever prepares client’s 2019 Return will have to understand what happened and include an explanatory statement so the IRS will understand why there was an excess contribution when the Form 5498 issued by the IRA custodian will show a rollover contribution.

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