ROTH CONVERSIONS & 401(k) RMDs: TODAY’S SLOTT REPORT MAILBAG

Thursday, June 03, 2021

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hi! I attended the February 2021 IRA seminar and had a question re: Roth conversions.  The seminar discussed rolling over assets held in a company plan into a Roth IRA. I’m dealing with a client that wants to roll over a lump sum from a state pension plan into a Roth IRA.  Can you tell me if in your experience this is generally permitted (assuming tax is paid on the conversion amount)?

Thank you in advance.

Patrick

Answer:

Hi Patrick,

Lump sum distributions from tax-qualified employer retirement plans can be rolled over to a Roth IRA. A state pension plan would qualify as a tax-qualified plan. Moving funds from the plan to a Roth IRA is a conversion, which is a taxable event.

Question:

If you are an employee who participates in a 401(k) and you are a non-owner employee and retire at, for example, age 73, do you have to take an RMD in the year you retire or can you take your RMD by April 1 of the year following retirement?

If you can take your RMD by April 1 of the following year, does that mean you have to take two RMDs in that year?

Answer:

If you delay RMDs beyond age 72 under the “still-working exception,” the first RMD is due for the year you retire. You can defer the RMD for that year until the following April 1, but that would give you two RMDs for that following year. Be careful, though. If you want to do a rollover of your 401(k) funds, any RMD due must be taken first before the balance can be moved to an IRA. So, if you do a rollover in the year you retire, the RMD must be distributed prior to the rollover and cannot be delayed until the following year.

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