Later Retirement and RMD's

[Guest David Hammond CISP]

Hi Everyone,

A non-owner/non-key employee continues to work and particiapte in a workplace retirement plan until they turn age 73 in 2002. Under modifications to the 401(a)(9) Regs (dating back to the mid- 1990's) they can postpone commencement of their RMD's until the LATER of turning age 70 1/2 or retirement from the employer plan.

At retirement in 2002 they request and complete a Direct Rollover of the full proceeds to an IRA before 2002 closes.

Are they required to take an RMD for 2002 from:

1. the workplace place prior to the Direct Rollover to the IRA?

2. the Receiving IRA? (it has no balance as of December 31, 2001)

3. No RMD until Dsitribution Year 2003?

Any citable reference would also be appreicated.

Three cases in the past two days involving this issue.

Cordially,

David Hammond

[BPickerCPA]

Upon retirement, they become liable for an RMD, based upon the prior year's year-end value. Since you cannot rollover a RMD, the participant has to take the RMD before rolling over the balance.

Since most people err while handling this, the solution is to compute the RMD on the company plan, and take it from the IRA in 2002.

[mbozek]

Under the applicable rules an employee who continues to work after age 70 1/2 must take the first RMD no later than April first of the year after termination, i.e., 4/1/03. An employee who waits until 4/1/03 to take the RMD for 02 must take the 03 rmd by 12/31/03 which could put the employee into a higher marginal tax bracket for 03 (tax rates will not be reduced in 03). Since there is only a 3 month deferral the ee should take the 02 rmd by 12/31/02 unless there will be a large deduction available in 03 or the rmds for 02 and 03 will be less than the ees 02 salary + the 02 mrd. The only way to defer the rmd for 2002 would be to retire 1/1/03.

[Appleby]

I agree that the RMD for the qualified plan must be distributed ( in 2002) before the amount is rolled to the IRA.

However, if the participant failed to remove the RMD prior to the direct rollover, then the RMD amount is treated as an excess contribution to the IRA. (Treas. Reg. 1.402©-2 defines an RMD amount as a ineligible rollover )

The individual must add the RMD amount to his/her income for the year the direct rollover was done.

The amount (representing the RMD) then is not removed from the IRA as a regular RMD distribution, but a return of excess contribution. This prevent the distribution form being taxes twice and taxes care of any earnings/loss attributable to the amount that was ineligible to be contributed to the IRA