RMD out of 401k, rollover into IRA, avoid taxes though QCD's from IRA?

Submitted by Thomas Partridge on Fri, 2022-11-11 15:08

I’m an advisor, attended Ed Slott forum in Mpls,MN in June of 2022. Ed is the only person I TRUST for correct answer.
Problem, client wants to rollover his 401k plan from former Employer of several decades ago into IRA. However IBM/Fidelity
will NOT allow rollover without first taking $22,700.00 in RMD first. Client wants to do QCD’s from IRA before end of 2022 based
on valuation of 12/31/2021 RMD calculation on 401k, without paying taxes on RMD that he is required to take first. Can Client redeposit RMD back into new IRA without taxes being withheld, once account is updated submit QCD forms from new IRA and NOT PAY TAXES ON THE RMD THAT HE RECEIVED FROM 401k after rolling it over and doing RMD through QCD’s?
Anyway to offset taxes from mandatory RMD and still do the QCD’s for this calendar year?
There must be some IRS loophole that would allow this with documentation???
TJP/Minnesota

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Permalink Submitted by Alan - IRA critic on Fri, 2022-11-11 16:38

This strategy will not work until the year after the rollover from the 401k, when there will be an IRA RMD which can be offset by a QCD. For the current year, the 401k RMD like any RMD is not eligible for rollover, and if rolled over in error would create an excess IRA contribution. For this year, the client can still do a QCD from the IRA using the funds that were rollover eligible, but since the IRA will not have an RMD, the QCD will not reduce 2022 taxes, it would just reduce the 12/31/2022 balance a small amount resulting in somewhat smaller future IRA RMDs.
This strategy is workable, but it requires the 401k rollover to be done prior to the first RMD distribution year.
Not sure when client 401k RMDs began, but if this is the first such RMD, client might determine if the old 401k holds any highly appreciated employer shares eligible for NUA. If the employer was IBM and the company shares were purchased decades ago, they would have massive appreciation. But if client took prior year distributions from the plan after reaching 59.5 including any recent year RMD, NUA would be disqualified by those intervening distributions.