401K RMD
We have a client who is 75 years old. He retired this year and rolled his 403B over to his IRA. He didn’t take RMD’s from his 403b the last few years because he was still working. I have read that once a person retires, he can delay the first RMD until April 1 of the following year. My questions are:
– Does that rule still apply now that he rolled it into an IRA?
– Is the rule different if he left his money in the 401K?
Permalink Submitted by Alan - IRA critic on Tue, 2021-12-07 21:33
Yes, the IRA rollover makes the difference because it is a distribution. Since client retired this year, 2021 became an IRA distribution year. The 403b plan should not have included the 2021 RMD in the rollover, it should have been distributed to client. The result is that the amount of the RMD that was rolled over must be reported as a taxable RMD distribution, and also as an excess contribution to the IRA that must be removed from the IRA with allocable earnings. Put another way, his 2021 plan RMD has been completed, but that amount was not eligible for rollover. The tax implications of this are not bad, but the reporting is a hassle since the rollover 1099R will have to be reported differently and explained to the IRS why.
Without the IRA rollover, the IRA excess contribution would not have occurred. Client must still take the 2021 403b RMD, but has until 4/1/2022 to complete it. Then client would also have to take the 2022 403b RMD before rolling over what was left in the plan.
Permalink Submitted by Robert Roselli on Wed, 2021-12-08 15:33
Your explanation if he left his money in the 403B makes sense.Since he rolled the money over, it sounds like he does have an RMD before 12/31/2021. His RMD is $ 13,020.17. The rollover was $ 418,365.57. If I’m following you, the rollover should have been $ 405,345.40, and his RMD should have been processed before the rollover for $ 13,020.17 and be taxable. Since the whole amount was rolled over, the 1099-r is going to show $ 418,365.57 all being non-taxable.We need to remove the $ 13,020.17 plus all earnings. My questions are:- From an operations standpoint, it sounds like our only task is to work with the custodian to remove the RMD amount plus earnings?- Will the custodian that held his 403B issue an amended 1099-R or is it on my client to work out with CPA & the IRS?- Isn’t the onus on the prior custodian to make sure the RMD was processed first? They almost always do.- I assume my client will have to report the earnings on the $ 13,020.17 as taxable income?- What would happen if this wasn’t caught by 12/31/2021?sorry to bombard you with questions, but this sounds like something that needs to be fixed soon. As always, I appreciate your help.
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-08 16:02
You are correct about the large rollover including an RMD of 13,020 unless the RMD was distributed before the rollover, perhaps early in the year. If it wasn’t, then there is an excess IRA contribution of 13,020 which must be removed with earnings.
Yes, the excess IRA contribution should be explained to the IRA custodian as caused by the rollover of an RMD, if it was not satisfied earlier in the year. The 403b administrator will not normally revise the 1099R, and if not the CPA will have to report the RMD as taxable and the direct rollover of the balance in a reduced amount without the RMD. Since this reporting will not reflect the 1099R numbers, an explanatory statement with the return will be needed.
Yes, the 403b administrator should have handled the RMD correctly. The IRS may not be too concerned because the IRS still considers the RMD completed, but was not eligible for rollover.
Earnings on the 13,020 will show up as taxable income in Box 2a of the 1099R issued by the IRA custodian. Those earnings will be taxable in 2021, the year the excess contribution was made, even if not returned until 2022. Completing the excess contribution correction before year would be better, since the 1099R will be issued in January and this can be wrapped up with the 2021 tax return.
I would still double check if that RMD might have been distributed earlier in the year by the 403b. If it was, then there would be no RMD rollover problem to resolve.
Permalink Submitted by Robert Roselli on Wed, 2021-12-08 20:15
Thanks for the very valuable input