Corrective Action for Direct Rollover of RMD from Defined Benefit Plan
In a June 21, 2021 post titled “Clarifying the Rollover/Transfers Rules When an RMD Is Due” by Ian Berger, I read the following:
“You do not have the same flexibility with an RMD if the direct transfer is made from a company plan. In the eyes of the IRS, a company plan transfer is a distribution and then a rollover. Repeat after me: RMDs can’t be rolled over. So, whether it’s a 60-day rollover or a direct transfer from a plan, the RMD must be paid first.”
I have made this error by direct rollover of the full value of a qualified 401(a) state retirement plan to an IRA without taking the 2024 RMD first. As the corrective action, can I simply withdraw the RMD plus earnings from the IRA and include it in my income when I file my 2024 taxes, or is it more complicated than that? I turned 73 in 2024. Thank you for any help on next steps.
Permalink Submitted by Alan - IRA critic on Fri, 2024-11-15 16:33
As the article states, a direct rollover is treated as a distribution, therefore the direct rollover satisfied the plan RMD. But the 1099R will not recognize that therefore only the allowable amount of the direct rollover can be reported as non taxable. The RMD amount must be reported as a distribution on line 5b of Form 1040.
The second portion of this error is that the RMD amount must be treated as an excess IRA contribution and removed from the IRA as a corrective distribution with allocated earnings. You should tell the IRA custodian the amount of excess and that it was caused by the rollover of an RMD.
Tax wise this is not expensive at all, and you end up with the RMD amount outside of any plan as intended. The hassle is the proper tax reporting because you will have to report the G coded direct rollover 1099R as only a partial rollover, and you should include an explanatory statement with your 1040 why you are reporting that way.