RMD Problems with Plan Rollovers to IRAs

By Bevery DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

Generally, it is a good idea to move your employer plan funds to an IRA once you stop working. However, if you are over the age of 70 ½ at the time you move those funds, you MUST take your required minimum distribution (RMD) from the plan first. Most employer plans understand this and will automatically send you a check for the RMD amount and then transfer the balance to your IRA.

When funds that include the RMD go from the employer plan to an IRA, you have an excess contribution in the IRA. This cannot be fixed by simply taking the amount of the RMD out of the IRA. That would be too easy and too logical. Our tax code has a better way – read that as more complicated – to fix your excess contribution.

Here is the tax code logic.

• All distributions from an employer plan are rollovers. They are either direct or indirect (60-day) rollovers, but they are all rollovers.
• Required minimum distributions are ineligible for rollover.
• The first money out of the plan is the RMD. It does not matter that you could wait until the end of the year to take your RMD, the first money out of the plan is your RMD.
• You cannot take an RMD for one type of retirement account from a different type of retirement account. Therefore, you cannot take your employer plan RMD from your IRA, even if you just rolled it in there by mistake.

If you are correcting an excess contribution before October 15of the year after the RMD went into the IRA, you have to tell the IRA custodian that you want to take a distribution of an excess contribution. The amount would be the amount of the RMD that went into the IRA account. Then a net income calculation is completed. Hopefully the IRA custodian will do this for you, but if they will not, the formula is in IRS Publication 590-A. The RMD amount plus/minus the net income is what is withdrawn from the IRA.

Unfortunately, I have seen several instances where 403(b) plan participants have not had their RMDs paid out to them before doing a rollover to an IRA, and some of these participants have had several years of distributions to an IRA. The problem is only compounded when they are told to take the RMD from the IRA. That distribution cannot satisfy a 403(b) RMD.

If you find yourself in this situation, you should work with an expert in this area to help you correct the situation. You should not rely on the employer plan that made the mistake in the first place to help you correct the problem. And don’t ignore the situation either. An excess IRA contribution that is not properly removed is subject to a 6% penalty per year for each year that it remains in the IRA. When it is not reported to IRS on Form 5329, the statute of limitations does not start to run on the transaction.