in-service distribution for a participant of RMD age while still working

Submitted by Laura Gutierrez on Thu, 2023-12-14 17:59

We have (2) clients that processed an in-service distribution from their 401(k) earlier this year 2023 and are both of RMD age. Each scenario is a bit different, but my main questions is if any of these event’s triggers an RMD for this year or possible excess contribution.

Client A: Turned age 73 this year
– in service distribution processed April 2023 from his 401(k) to IRA
– The participant’s employment status is Active and not showing 5%, plan did not process an RMD with this transaction

– does the in-service amount transferred to his IRA trigger an RMD for 2023 since he is of RMD age, or will RMD begin in 2024?

Client B: Age 75
– in service distribution processed March 2023 and at the time was active with the employer and not more than 5% owner.
-no RMD was issued with this transaction from the employer
-CURRENTLY, the participant is showing terminated with the employer as of 7/2023

– Is the client subject to an RMD in 2023 for the in-service amount given that he is terminated in the same year the in-service occurred? Or can he defer until 2024?
-how is the RMD portion calculated off a partial in-service distribution and would this the RMD be removed as an excess contribution this year?

Thank you.

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Permalink Submitted by David Mertz on Thu, 2023-12-14 18:41

Client A: Nothing about the rollover is an RMD or triggers future RMDs. Only separation from service with this employer will begin RMDs.
Client B: Separating from service in 2023 has caused 2023 to be an RMD year with respect to the plan and has caused the distribution made earlier in 2023 to be partially or entirely RMD for 2023 (depending on whether this distribution was more or less than the client’s RMD for 2023. If less than the 2023 RMD has been distributed so far in 2023, the client has until their required beginning date for RMDs of April 1, 2024 to complete the 2023 RMD. No part of the distribution in March 2023 that satisfies the 2023 RMD was eligible for rollover, so if any of that portion was rolled over it has generally become an excess contribution.

Permalink Submitted by Alan - IRA critic on Thu, 2023-12-14 18:47

Client A – the in service distribution will not trigger RMDs for the 401k as long as client continues to work for this employer. As for the IRA balance created by the rollover, there is no 2023 RMD for these funds, but there will be for 2024 based on the 12/31/2023 IRA balance. However, note that in future years if client does the same rollover from the 401k, but retires later in that year, that year will become an RMD distribuiton year for the 401k, and the amount of that RMD would not be eligible for rollover, and an excess IRA contribution would result to the extent that the RMD amount rolled over exceeded his available regular IRA contribution for that year.
Client B falls under the above situation. 2023 became a 401k RMD distribution year resulting from his retirement during that year, and the 2023 RMD must be applied to the March distribution and was not eligible for rollover. It likely created an excess IRA contribution to the extent client was eligible for a TIRA contribution that was not made. The excess must be removed from the IRA with allocated earnings and any gains would be taxable in 2023 even if the corrective distribution is done in 2024 by the extended due date. Finally, if some of the RMD rollover can be applied as a regular TIRA contribution, if it is deducted it would offset the deducted amount from any future QCDs. This situation is typical for those of RMD age who retire later in a year that they did a direct rollover. If they knew they were going to retire, they should have had the plan RMD distributed before doing the direct rollover.
Further to the Client B situation, if his plan RMD was 10,000 and he rolled over 30,000 earlier in the year, since 10,000 of the rollover was an RMD, client should report 10,000 as a taxable distribution on line 5 of Form 1040, and only 20,000 as a direct rollover because the RMD was actually satisfied in March and was not eligible for rollover. Client would need to include an explanatory statement with their return explaining why the return did not conform to the plan issued 1099R.

Permalink Submitted by Laura Gutierrez on Thu, 2023-12-14 20:32

Thank you so much for your response. The plan sposor did not distribute a RMD because at the time he was still employed. Now that he is retired, would we go back to get to get the correct 2023 RMD amount (using 2022 values) or since he has until tax filing deadline we would use 2023 statement values? Is there anywhere I can read more about this specific rule about RMDs being triggered if an in-service occured the same year as retirement? I haven’t been able to pin point an exact source for these types of cases. Thank you!

Permalink Submitted by Laura Gutierrez on Thu, 2023-12-28 16:08

Can the excess contribution be distributed as a normal IRA distribution or does it have to be marked with the IRA custodian as an “excess contribution” withdrawal type?

Permalink Submitted by Alan - IRA critic on Thu, 2023-12-28 17:39

It should be processed as a removal of an excess IRA contribution and the 1099R coded as such. The IRA custodian should be told that part of the rollover was an RMD and that this RMD amount must be treated as a regular IRA excess contribution. But note that if the taxpayer is eligible to make a regular IRA Contribution that was not made, that amount would not be excess.

Permalink Submitted by Alan - IRA critic on Thu, 2023-12-14 23:13

There are several different IRS Regs that apply to this entire situation. I cannot post them all, but a key IRS Reg is copied below. It explains that the first distribution in a RMD distribution year is applied to the RMD, and gives an example. Because the client retired in 2023 and was over RMD age, 2023 became the first RMD distribution year and the March direct rollover (A direct rollover is treated as a distribution) is applied against the RMD, the RMD was completed and must be reported as a taxable distribution up to the RMD on Form 1040, regardless that the 1099R will not show a taxable amount. The portion of the RMD that was rolled into the IRA then becomes an excess IRA contribution that must be removed from the IRA. This is not a costly error, but it IS a reporting hassle. Client will owe about the same amount in taxes that would have been due if client took the RMD first and then rolled over the rest. IRS Reg 1.402(c)(2) QA 7 follows:
“Q–7: When is a distribution from a plan a required minimum distribution under section 401(a)(9)?A–7: (a) General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a)(9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies.”

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in-service distribution for a participant of RMD age while still working

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