IRA Trivia: Missed RMD or Excess Contribution?

By Andy Ives, CFP®, AIF®
IRA Analyst

Here is an all-too-common situation that seems counterintuitive: A participant in a 401(k) retires and must take his required minimum distribution (RMD). This person requests that his entire 401(k) plan balance be directly rolled over to an IRA. The plan follows the participant’s direction, and the entire amount is sent to the IRA.

PROBLEM: No RMD is distributed from the plan prior to the movement of money to the IRA.

QUESTION: Do we have a missed RMD situation?

ANSWER: We do NOT…but all is not well.

The RMD from the plan must be taken prior to the rollover to the IRA. RMDs are not eligible to be rolled over, so it should have been distributed. Oftentimes people think they can roll a 401(k) RMD to their IRA and simply take that plan RMD from the IRA later in the year. Incorrect. This is not permitted.

So, if an RMD cannot be rolled over, then how do we NOT have a missed RMD in the scenario outlined above?

Technically, a direct rollover from a plan to an IRA is just that: a rollover. It is NOT a direct transfer like we see with IRA-to-IRA transactions. Direct transfers between IRAs do not generate any tax reporting. There is no 1099-R or Form 5498 with direct transfers. As such, RMDs can be directly transferred from IRA to IRA. But they cannot be ROLLED over from IRA to IRA.

Plan balances, like in a 401(k), cannot be directly “transferred” to an IRA. The movement of money from plan to IRA is a direct rollover, and rollovers generate tax forms. A 1099-R reports the distribution from the plan, and a 5498 shows the offsetting rollover/redeposit into the IRA.

And therein lies the sneaky answer as to why we don’t have a missed RMD in the scenario above. Technically, the plan paid out the entire balance, including the RMD. The 1099-R will report a full distribution. As such, the RMD was TECHNICALLY paid out by the plan. The problem now is not that the RMD was missed. The problem is that the RMD was rolled over. And what is the result when an RMD is rolled over? We have an excess contribution for the RMD amount in the receiving IRA.

The corrective measure here is NOT to follow the missed RMD correction process. Instead, we follow the excess contribution rules. If timely corrected by the October 15 deadline, the erroneously rolled-over RMD is removed from the IRA along with any earnings (“NIA” – net income attributable) as an excess contribution withdrawal. The earnings are taxable, but there is no penalty and no special tax forms to file. Oh…and no missed RMD.

If you have technical questions you would like to have answered, be sure to submit them to [email protected], to be answered on an upcoming Slott Report Mailbag, published every Thursday.