Conversion of 401k to IRA at age 73
I am 73 and just converted my 401k to an IRA but did not take the RMD yet from the 401k. Will I be penalized or can I just take the required amount from the IRA?
OK, but that’s a direct rollover, not a conversion. It does not change the end result, and you still rolled over the 401k prior to completing the RMD and it is surprising that the plan administrator overlooked this requirement.
You still have a taxable distribution for the amount of your RMD and an excess IRA contribution of that same amount that must be removed as an excess IRA contribution adjusted for gain or loss. Be sure the IRA custodian understands that the reason for the corrective distribution is that an RMD for the plan was rolled over. While not required to be completed this year, you should still do so as that would confine the tax reporting to a single year.
Permalink Submitted by Alan - IRA critic on Mon, 2024-10-14 23:52
The plan administrator should not have allowed a direct rollover to a Roth IRA in an RMD year in which the RMD had not been completed. However, the distribution will be treated as your RMD up to the amount of the RMD and that same amount was not eligible for rollover. This creates an excess IRA contribution, which must be corrected in the same manner as any regular IRA excess contribution. There is no other penalty, just a reporting hassle.
For example, if your 401k balance was 100k and your RMD was 4000, then 96,000 is the allowed amount of the rollover. The 4000 will have to be reported as a taxable distribution from the 401k which satisfies your RMD but was not eligible for rollover because RMDs are not eligible for rollover. The corrective distribution from the IRA is not taxable except for any gains on the 4000 while in the IRA. You will have to explain to the IRA custodian that you converted your RMD and must now treat that amount as an excess IRA contribution to be removed.
While the taxes due will not be increased except for any gains on the 4000, this will create a reporting hassle because the 401k will issue a G coded 1099R for the full 100k but you can only report 96k as a rollover, and the IRA custodian will issue a 5498 for 100k, but will then have to issue their own 1099R for the removal of the excess contribution. Therefore, you will have to report differently from what the G coded 1099R indicates and provide an explanatory statement about this with your tax return.
A 401k RMD cannot be satisfied from an IRA, so put another way you will be reporting the 4000 portion as your 401k RMD, and the corrective distribution from the IRA is not treated as an IRA RMD.
Permalink Submitted by David Kremberg on Tue, 2024-10-15 09:02
Thanks for the reply. Just a clarification: the conversion of the 401k was to a traditional IRA just to simplify RMDs going forward. It was not converted to a Roth. Does that change your response?