401K/IRA RMD

Submitted by RUSSELL MONTGOMERIE on Thu, 2020-02-13 14:39

I HAVE A CLIENT WHO IS A 5% SHAREHOLDER AND WHO IS TAKING THEIR FIRST RMD FOR 2019 YEAR BEFORE APRIL 1, 2020 AND THEN THE 2020 RMD LATER THIS YEAR. TWO QUESTIONS

1. CAN THEY ROLLOVER AN IRA INTO THE 401K (ASSUMING PLAN PROVISIONS ACCEPT ROLLOVERS, ETC. AND THE IRA IS ALL PRETAX MONEY) AND THEN TAKE ONE RMD FOR 2019 FROM THE 401K TO SATISFY THE IRA AND 401K’S RMD FOR 2019?

I BELIEVE IT WOULD BE CLEANER TO DO TWO SEPARATE 2019 RMD FROM THE IRA AND 401K FOR TRACKING PURPOSES, BUT JUST ASKING.

2. SAME QUESTION AS IT PERTAINS TO THE 2020 YEAR AND THAT RMD.

JUST CONCERNED ABOUT EXCESS CONTRIBUTION OF RMD INTO 401K ETC. ETC



Submitted by David Mertz on Thu, 2020-02-13 15:36

No.  Both the 2019 and 2020 RMDs for the IRA must be satisfied from the IRA before rolling any other part of this IRA to the 401(k) in 2020.  The first amounts distributed from the IRA are these RMDs and RMDs are not eligible for rollover to the 401(k).  Any 2019 and 2020 RMDs for the 401(k) must be satisfied from the 401(k) separately from the RMDs for the IRA.

Submitted by Alan - IRA critic on Thu, 2020-02-13 15:52

  • The % ownership break is for a >5% shareholder, not 5% exactly. If client owns 5% exactly and is still working but the plan requires all employees to start RMDs regardless of ownership, then the plan RMD is not a statutory RMD and when the plan distributes the plan only RMD, it is eligible for rollover.
  • However, if client is subject to a statutory RMD (reached 70.5 in 2019 and is >5% owner) the first plan distribution in 2019 or 2020 is applied to the RMD and cannot be rolled over.
  • The first IRA RMD distribution year is 2019, therefore a direct rollover of the IRA to the 401k cannot be done until the RMD for THAT IRA is completed. If this rollover is in 2020, the IRA RMD for both 2019 and 2020 must be completed.  If any part of the IRA RMD is not completed, rolling IRA RMD funds into the 401k creates an excess contribution to the 401k and must be withdrawn.  Since client is subject to RMDs for both plans, doing this rollover does not reduce the total RMD. Therefore, the answer to your first question is No, the IRA RMDs must be distributed to client before any rollovers into the 401k. The 401k balance as a result of the rollover will be higher on 12/31/2020, and therefore the former IRA money now in the 401k first becomes subject to 401k RMDs in 2021.
  • Because the rollovers do not reduce total RMDs in this case, client should consider other possible advantages.  ERISA creditor protection for the 401k is better than IRA creditor protection in some states or there might be better low cost investment options in the 401k. Another  reason clients may want to roll an IRA balance to a 401k is any basis in their IRA can be fully recovered in a Roth conversion. However, as in this case where client has IRA RMDs to be distributed the basis is totally recovered ratably between the RMDs and the conversion. Therefore, the taxable portion of the RMD is reduced, but in exchange there will be a taxable component for the conversion. Form 8606 should be completed to drill down to the actual numbers.

Submitted by RUSSELL MONTGOMERIE on Thu, 2020-02-13 19:57

Thank you

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