Are the RMD Withholding Rules Different for a Pension Plan?

By Joe Cicchinelli and Beverly DeVeny
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This week’s Slott Report Mailbag goes situational – looking at an individual who forget to take his RMD (required minimum distribution) before rolling over his pension plan to an IRA, a woman who wants to find the best path to leave her IRA to her three sons and an employee who was re-hired by his old company and wants to know if he can roll his original 401(k) plan to an IRA. We have the expert answers below. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

I need to know what the RMD requirements are for the funds in an employer sponsored pension plan upon retirement. I retired on June 30, 2014 and chose to take a lump-sum distribution option as a direct rollover to my Traditional IRA account. However, there were no RMD dollars withheld from the rollover amount. The RMD dollars were withheld from the direct rollover of the funds from my 401(k) and 403(b). Are the IRS rules for RMD withholding different for a pension fund? And if so, please clarify. 

Thank you,

Jim Johnson

Answer:
If you took a lump-sum distribution from a pension plan in the year you turned age 70 ½ or later, then the entire amount should not have been rolled over. You should have taken your pension RMD first and then directly rolled over the remaining funds to your traditional IRA. Erroneously rolling over an RMD to your traditional IRA creates an excess IRA contribution that should be removed (with earnings) by October 15, 2015 to avoid the IRS 6% penalty.

2.

My three sons are beneficiaries of my IRA. If I die, how is the IRA distributed to them? As three separate IRA accounts? I read that the Supreme Court just ruled that such IRA inheritances are no longer IRA accounts, and that leaving the IRA to a trust would be better in many cases.

Cary Van Haaren
San Diego

Answer:
The Supreme Court only ruled that inherited IRAs are not considered IRAs for purposes of federal bankruptcy protection. Inherited IRAs are IRAs for all other purposes, including creating separate inherited IRAs for each of your sons after your death. Whether or not you should name a trust as the beneficiary of your IRA is a decision that will depend on your particular situation. You should discuss the situation with a professional that has expertise in IRA distributions when a trust is the beneficiary. A trust beneficiary significantly complicates how IRA funds get to your sons.

3.

I worked for a company several years ago and left it about 10 years ago. At the time, I had a 401(k) that had a balance of approximately $250,000. I chose not to roll it over into an IRA. Seven years ago, that employer rehired me and I was, and am today, a participant in a new 401(k) profit sharing plan, in which my employer has made matching contributions into this plan, the new one only. Can I, at this time, roll over that originally $250,000 into an IRA?

Answer:
It depends on the terms of your employer’s plan whether or not your original $250,000 can be rolled over to an IRA. Check with the plan administrator to see what, if any options you might have.