THE RULE-OF-55 AND RMD CONVERSIONS: TODAY’S SLOTT REPORT MAILBAG

Thursday, May 19, 2022

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

Question:

Hi,

I am age 50 and am targeting retirement at age 55. My current employer is selling the division I work for, and I see the potential that I could be laid off at, say, 52. If this were to happen, could I join a new employer with a 401(k) plan, roll my old 401(k) over to the new plan, and then take a distribution (both the rolled-over funds and the new 401(k) funds) under the rule of 55?  The statute suggests that I could do this, but I have seen comments that the rollover funds wouldn’t count.

Thanks,

Dave

Answer:

Hi Dave,

This will work, and is a good workaround. You want to make sure your new employer allows incoming rollovers (some don’t). And, you need to separate from service from your new employer in the year you turn age 55 or older. Finally, if you roll over your “rule-of-55” distribution to an IRA, you’ll have to wait until age 59 ½ to withdraw the IRA funds penalty-free. That’s because the age-55 exception does not apply to IRAs.

Question:

Hi Mr. Slott,

I read somewhere that if we need to withdraw a required minimum distribution (RMD) but don’t need the money, we can convert this RMD to a Roth IRA. Is this true? 

Thanks in advance,

Puzzled

Answer:

Puzzled,

Sorry, but that won’t work. A conversion to a Roth IRA is actually a rollover, and RMDs can never be rolled over. However, once the RMD has been satisfied, any additional withdrawals could be converted to a Roth IRA.

 

 

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