Another question about RMD vs. IRA Rollover

[Guest FREE401k]

I know there have been lots of posts about this topic but with things changing, etc. I want to make sure I have the latest/greatest knowledge. We have a retired 401(k) participant who will be 70 1/2 in calendar year 2002. Can he roll his approx $8,000 balance out of our 401K plan into an IRA and take RMDs from there, or do we have to pay him the RMD then he rolls the remainder to the IRA? I think the answer is the latter, but want to be sure so a cite would help...thanks!

[mbozek]

It really should not matter which option you choose-- If the plan withholds the MRD then the participant can rollover the balance to the IRA without having to make a MRD. If the plan allows a rollover of the entire account balance then the part. must make a mrd by 4/1/03. The problem is that the regs under 401(a) (31)-1 require that the mrd amount be withheld from any rollover payment and paid to the participant (less 20% withholding) who can then rollover the mrd to an IRA until 4/1/03. Makes sense, right?

[Guest Harry O]

I disagree with Mbozek (if I understand his post correctly). It does matter and the law is clear on what has to happen here. The 401(k) plan is required to distribute the RMD. The employee can roll over the net amount to his IRA.

It matters because the 2002 rollover contribution would not be taken into account by the IRA for his 2002 RMD. This is because the account balance for the 2002 IRA RMD is the IRA account balance as of 12/31/01. Since there is nothing in the IRA on 12/31/01, he would have a $0 RMD from the IRA for 2002 (payable by 4/1/03).

The MRD would be subject to 10% withholding.

[Guest FREE401k]

I wasn't sure if it matters that this person turns 70 1/2 this calendar year - someone here said that since they are turning 70 1/2 this year, the RMD doesn't have to be paid until next year so they can roll the whole thing out to an IRA this year.

Sometimes I yearn for a job where answers are easier! But I guess that's why we make the big bucks, huh?

[Guest Harry O]

I believe the regulations are clear that any payment made to an employee in the year he turns 70.5 is first treated as a minimum required distribution even though he could have deferred all payment until April 1st of the following year.

[mbozek]

Harry: could you please provide the cite. I have not reviewed the final a9 regs, but although proposed reg. a9-7 Q/A-3 requires that the transferror plan must determine the mrd amount it also says that the transferror plan may (not must or shall) satisfy the mrd for the year of transfer by segregating the mrd from the employee's benefit and not transferring that amt. Such amt may be retained by the transferror plan and distributed by the mrd. I want to know if this language changed to must in the final regs. The participant can still rollover the mrd to an IRA and defer distribution until 4/1.

[Guest Harry O]

It is not in the MRD regulations, it is in the section 402© regulations that define an "eligible rollover distribution." See Reg. 1.402©-2, Q&A 7(a).