RMD on 401k with zero balance because of rollover

Submitted by Doneel Edelson on Mon, 2022-12-12 18:58

I am moving from one company to another, last day at first company is Dec 31, I am over 72.
I was advised to rollover the old 401k to the new 401k before Dec 31 – get a check from the first plan made out to the second plan (which I will join in Jan).
Do I need to take an RMD in 2023 on the first 401k plan since it will have a zero balance on Dec 31?
If yes, how do I do that – where do I take the money from and when?
Thanks



Submitted by David Mertz on Mon, 2022-12-12 21:44

  • Because your last day at the first company will be December 31 and you are over age 72, you will have a 2022 RMD that must be satisfied with a distribution from the first 401(k) before rolling the remainder over to the new 401(k).
  • Although you’ll have until April 1, 2023 to make the 2022 RMD distribution from the first 401(k), doing this 2022 RMD distribution and rollover of the remainder by the end of 2022 will avoid the need to also take a 2023 RMD from the first 401(k) before rolling over the remainder to the new 401(k).

Submitted by Alan - IRA critic on Mon, 2022-12-12 22:13

  • If your last day at current company is 12/31, most plans will show you as retired on that day and therefore in 2022. That will make 2022 an RMD distribution year as you will no longer qualify for the “still working exception”, and any direct rollover completed anytime in 2022 will be treated as including your 2022 plan RMD if not completed earlier. Such RMD will not be eligible for rollover and if contributed to the new plan would create an excess contribution (known as excess amount in a 401k) which must be corrected by a distribution including allocated gain or minus losses. You would end up with a taxable RMD in 2022, and a messy excess contribution to remove, more problematic if the excess went into the new 401k than if it went into your IRA. Therefore, if you can determine your retirement date under the former plan, and if it is in 2022 as expected, you should just take out your RMD before doing any rollover and avoid the reporting hassle you will have if an excess contribution occurs. 
  • As for the new plan, you will not have a 2023 RMD if you are still employer there on 1/1/2024 as you would qualify for the “still working” exception. If you retire before 2024, you will have the same 2023 RMD situation as you do now under your current plan for 2022.  Also, should you not qualify for the still working exception in 2023 for the new plan, you would not avoid an RMD due to the new plan not having a balance on 12/31/2022 unless the direct rollover distribution was made in 2023, and therefore a 2023 RMD would be due for the former plan. 
  • While confusing, there is no timing strategy for the direct rollover to avoid RMDs. The only way to avoid a 2022 RMD is to not be treated as retired in 2022 on their books, and the only way to avoid a 2023 RMD is to both have the direct rollover distribution made in 2022 and then also meet the still working exception for 2023 by working beyond 12/31/2023.

Submitted by Doneel Edelson on Wed, 2022-12-14 13:12

This was very helpful, thank you!

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