Jump to content

RMD and in-service distribution


Guest Jennyb473

Recommended Posts

Guest Jennyb473

Have a participant who turned 70.5 in 2010, so his RBD is 4/1/2011. But is still employed and not a 5% owner, therefore his RBD is not until after he retires if he opts to postpone his RMD. I have that correct so far, right?

He took an in-service distribution of most of his account balance earlier in 2010 and rolled it over. He now wants to take the remainder of his account balance as an in-service distribution and again roll it over. Can he?

My thought is we cannot stop him since the plan allows for the in-service distribution and his RBD is not until after he retires, which has not yet done. Is this correct? I cannot find anything in the ERISA Outline Books that even talks about in-service distributions at all, let alone how it may impact an RMD.

If he cannot do this, his RBD is still not until after retirement and the in-service w/d he took earlier in the year does not turn into an RMD, right?

Link to comment
Share on other sites

The above-cited string is about an owner, but the OP describes an employee who is not an owner and whose MRD is not yet due (since there has been no termination of employment).

So, since there is no MRD required for the year (i.e., this is not the first distribution calendar year), then in-service distributions can be taken & rolled over. Then, when the individual retires, an MRD is calculated and distributed for the first distribution calendar year (the calendar year of retirement--with an RBD of 4/1 of the next calendar year). The earlier (pre-MRD) distributions do not reduce the MRDs.

Link to comment
Share on other sites

MRD is not yet due (since there has been no termination of employment).

The earlier (pre-MRD) distributions do not reduce the MRDs.

Thanks, Sieve. I typed faster than I was thinking.

Does the part about MRD's being not due until termination (for a non-owner) have to be in the plan document, or does it apply no matter what?

I agree that the earlier (pre-MRD) distributions aren't subtracted from the MRDs when the MRD's actually start, but they may reduce the balance on which the MRD's are determined, which is a nice thing. (picky point, I know.)

Link to comment
Share on other sites

Consent of the participant is required in order to distribute an amount exceeding $5,000 as long as the account is "immediately distributable"--i.e., before normal retirement age under the plan (or age 62, if later). Treas. Reg. Sections 1.411(a)-11(b), ©(i) & ©(4). That's a roundabout way of saying that the Plan document could require a non-owner (or even an owner) to take an MRD at age 70-1/2 (or even earlier, depending on plan provisions re: NRA), because at that age the account no longer will be immediately distributable and therefore consent will not be required.

Link to comment
Share on other sites

Our pre-approved documents allow the plan's required beginning date for non-owners to be the same as for owners. I've never used that provision. I don't think the plan provision would make the distribution a required minimum under the rollover rules, but if the distribution amount is determined the RMD method, it would be an installment ineligible for rollover.

Link to comment
Share on other sites

Guest Jennyb473

thanks for the replies. I got nervous after reading that link - should have read the other posts first! Oh well....good knowledge if I can figure out how to keep it in my head!

Link to comment
Share on other sites

I agree that the participant can take the in service and roll it over without a RMD provided the document doesn't say otherwise, and the particicpant is a NHCE.

I know it's not the questions being asked, but doesn't that mean the there will be RMDs from the IRA since there is no provision to postpone RMDs in an IRA like there is in a QP?

Not sure that was a result the participant was looking for.

Link to comment
Share on other sites

  • 1 month later...

I have a similar situation with an active participant who took a partial rollover distribution during April 2010 when the RBD had not yet been established (due to active employment). But then on 12/31/2010 the participant terminated employment, so the RBD is now 4/1/2011. When you read through the code and regulations, especially Treas. Reg. §1.402©-2, Q&A-7, a strict interpretation of the rules requires that “any” distribution during the distribution calendar year must first meet the RMD requirements. Does this mean that we would need to code the 1099R to indicate that part of the rollover that occurred April 2010 was not actually eligible for rollover (about $70K of the $1M rollover) or can the participant merely take another $70K distribution from the plan prior to her RBD of 4/1/2011? She still has about $500K in the plan, more than enough to pay out the RMD. (As an aside, she also took a partial lump sum of about $20K in September 2010. So if the full rollover is okay, presumably the $20K is applied toward satisfying her minimum such that she need only take another $50K from the plan prior to 4/1/2011.) Thanks in advance for your thoughts.

Link to comment
Share on other sites

dcoderre -- I believe 70K of the 2010 direct rollover is an MRD, and thus must be removed from the IRA before, I think, 4/15 (but I'm not positivie of the date), and the 1099R recoded as necessary.

Link to comment
Share on other sites

must first meet the RMD requirements.

I agree with Mr. Sieve.

My understanding is that the first money distributed during an RMD year is deemed to be RMD money (until the RMD amount is satisfied), and RMD money is not eligible for rollover. This even if the distribution occurred before the "70-1/2 day" but during the year in which the 70-1/2 day falls.

Link to comment
Share on other sites

What a difference a day makes. Having term'd on 12/31/10, $70K (RMD) of her April 2010 rollover was ineligible for rollover, and then she took a $20K partial distribution in September which is on top of the RMD. So she has $90K taxable distribution in 2010. Had she termed 1/1/2011, she would have had only the $20K taxable distrib in 2010, as it appears she intended.

Link to comment
Share on other sites

  • 2 years later...

Have a plan participant (non owner) who turns 70 1/2 in August of this year (2013).

1st RMD from the plan would be due by 04/01/2014 and another by 12/31/2014,

Participant is still currently working but planning on retiring in July or August of this year.

If he retires in July or August, is the plan required to pay the RMD before he rolls the balance out?

Participant wants to roll the balance without the RMD and I believe the Plan must 1st pay the RMD and then he can roll the remaining balance.

Can anyone give me the applicable reg section?

Link to comment
Share on other sites

1.401(a)(9)-2 Q-2 says the Required Beginning date is the later of April 1 of the calendar year following the year the ee turns 70 1/2 or the year in which the employee retires.

1.401(a)(9)-7 Q 3 says (Reader's Digest condensed version) that the original plan MUST segregate the amount and not transfer it.

or was that Monty Python "Thou shalt not make a full transfer unless thou also holdest the minimum distribution in reserve"

this is one of those things that in some ways makes no sense. ee is working and requests a transfer of all $s. I guess because he 'might' quit before the end of the year, are you supposed to transfer everything but the possible minimum distribution? but then 12/31 arrives and the person didn't quit. so now do you roll the remainder of the balance except for the new possible minimum distribution? That makes no sense. or do you argu at the time of the transfer since he is still active (and you cannot predict the future) he has no RBD at the time of the transfer and therefore you transfer everything.

You compond the issue because you have the knowledge that the ee will indeed quit. Troublemaker.

Link to comment
Share on other sites

Participant takes in-service distribution now and rolls it into, say, an IRA. Since the participant is still an active employee (and not a 5% owner) and the participant has not given proper notice of his retirement date, the plan has no reason to segregate anything and must treat the entire distribution as rollover eligible.

If the participant reaches age 70.5 and retires later in 2013, then the participant has to take an RMD for 2013, which amount is based on his 12/31/2012 plan balance.

If at the time of the retirement, there's nothing left in the participant's plan account, then the plan advises the IRA that a portion of the rollover was an RMD and not eligible for rollover, and the participant has to go to the IRA and get back the RMD amount, no?

Link to comment
Share on other sites

I'm not reading the regs right now but I believe the key words are "not eligible for rollover." That doesn't mean it can't be rolled over, just that if it is rolled over, that the distributing custodian/trustee issues 2 1099-Rs, one for a rollover and one for a taxable distribution. Then the participant has to go to the receiving custodian and ask to have the (ineligible) money taken back out as an ineligible contribution. (NOT as a regular distribution because then they'll get another 1099-R showing it as taxable, again.)

Our policy is that if we know it's not eligible at the time of distribution, we won't roll it over. But yes, it can retroactively become an ineligible rollover and then it becomes a reporting issue.

Ed Snyder

Link to comment
Share on other sites

To add to what GMK and Bird are discussing, here's Reg 1.401(a)(9)-7 Q&A-1

Q-1. If an amount is distributed by one plan (distributing plan) and is rolled over to another plan, is the required minimum distribution under the distributing plan affected by the rollover?

A-1. No, if an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover. See A-1 of § 1.402©-2 for the definition of a rollover and A-7 of § 1.402©-2 for rules for determining the portion of any distribution that is not eligible for rollover because it is a required minimum distribution.

So the EE takes the full rollover now but then retires, so the plan sends appropriate 1099-Rs and a letter saying part of dist wasn't rollover eligible and must be removed from the receiving account.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

  • 2 months later...

The answer may be in the string above, and if so I apologize as I am not quite getting it. We have an active employee who is 72 years old. She wishes to do an in-service rollover of her qualified plan account to an IRA. My understanding is that since she was actively employed (and not an owner), her RBD was delayed until she was no longer participating in the plan. But I believe that the RMD rules for IRAs are different than qualified plans and use the age 70.5 rule even if the person is still working. So my question is this: do we (the employer) roll over the entire amount and leave it to the IRA custodian to then calculate and do the RMD? Or do we as the employer have to handle this differently because once it is rolled over to the IRA, it immediately becomes subject to the RMD rules? Whose responsibility is it (employer or IRA custodian) to calculate and process the RMD?

Thanks.

Link to comment
Share on other sites

^ I'd do the distribution now as a rollover. If the person terminates (retires) before the year is out, then you let her know a portion of the distribution was not eligible for rollover and issue the proper 1099's.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

It is the IRA's responsiblity to compute the IRAs RMD. As an aside I would take the position if this is a brand new IRA-- meaning no balance until the rollover-- the IRA does not have an RMD until 2014. After all a 2013 RMD is based on the IRA's balance as of 12/31/2012 which was zero. But I am not the worlds greatest IRA expert it is just how I have always understood it.

Link to comment
Share on other sites

Whose responsibility is it (employer or IRA custodian) to calculate and process the RMD?

As BG says, the employer is only responsible to calculate the RMD on the rolled over amount if the employee terminates before the end of 2013. If the employee retires in 2013, the employer issues the 1099's for the rolled over and taxable amounts. The employee has to then get that RMD amount from the IRA custodian.

If the employee does not retire in 2013, it's a straight roll over, and there is no RMD for 2013 on the rolled over amount.

Link to comment
Share on other sites

waid10 - you're way overthinking it. You couldn't care less what happens in the IRA because you're not responsible for the money once it's outside your plan. (The technical answer is she'll have to start taking MRDs next year on the monies rolled over this year. But again, that's not your concern. Reg 1.401(a)(9)-7 Q&A-2)

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

Related questions. What does note 2 on this form mean?

http://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Is it simply a reminder that you count rollovers as well as contributions in your total IRA balance?

From Publication 590:

Contributions. Contributions increase the account balance in the year they are made. If a contribution for last year is not made until after December 31 of last year, it increases the account balance for this year, but not for last year. Disregard contributions made after December 31 of last year in determining your required minimum distribution for this year.
Outstanding rollovers and recharacterizations. The IRA account balance is adjusted by outstanding rollovers and recharacterizations of Roth IRA conversions that are not in any account at the end of the preceding year.For a rollover from a qualified plan or another IRA that was not in any account at the end of the preceding year, increase the account balance of the receiving IRA by the rollover amount valued as of the date of receipt.

Basically, does "not in any account" mean not in a traditional IRA or does it mean something else?

Thanks.

Link to comment
Share on other sites

From the reg I cited above: "In addition, if the amount rolled over is received in a different calendar year from the calendar year in which it is distributed, the amount rolled over is deemed to have been received by the receiving plan in the calendar year in which it was distributed."

Basically, you can't avoid an MRD by having your rollover be "in transit" on December 31st. Just imagine if you took a distribution on 12/30 every year and deposited it on 1/1 two days later... in theory you'd have a zero balance on 12/31 and never take an MRD. So the Reg closes that loophole.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...