Required Minimum Distributions

[Guest rmdquestion]

I turn age 70 1/2 in October 2003 and have 2 conduit IRA's which hold only money from my former employers' retirment plans. I am currently employed and a participant in my current employer's 401(k) plan. I was told that if I roll both IRA's into my current employer's 401(k) plan, due to the RMD rules for retirement plans (no distribution due until April 1st following my termination date) I would not have to take RMD's on that money.

When I went to do a direct rollover to my 401(k) plan, both IRA custodians sent me a check for the 2003 RMD amount and sent the remainder to the 401(k) plan as a rollover. The both cited the tax code saying that even though I am not age 70 1/2 yet, I will be during the calendar year 2003, and any rollover made in 2003 cannot include the RMD amount. Is this correct?

Secondly, now that I have rolled the money into the 401(k) plan and RMD's were started am I still required to take RMD's on the money rolled into the 401(k) plan even though I am actively employed?

[mbozek]

This is an unclear area- the code does permit non 5% owner employees who work after 70 1/2 to delay commencement of benefits from a qualified plan. However, IRA owners are not eligible for such a deferral. The problem is that you waited until you attained the your mandatory distribution age before doing the rollover. You need to retain tax counsel to determine if you can defer the commencement of the IRA funds in the qualified plan until you terminate employment.

[Appleby]

The IRA custodians did the right thing.

Your first RMD is due the year your attain age 70 ½. However, for the first year, you are allowed to defer distributing the RMD until April 1 of the following the year you attain age 70 ½ ( this is referred to as the required beginning date.) However, even though you are allowed this deferment, any distribution taken during the year you attain age 70 ½ is considered part of your RMD for that year. According to the regulations, the first distribution in an RMD year is part of your RMD and is not eligible to be rolled over. Had the custodians rolled over the full balances, the portion representing your RMD would be considered ineligible rollovers.

For the balance that is rolled to the 401(k) plan, you are not required to take RMDs on that amount, providing the 401(k) plan allows you to defer your RMD until you retire and you are not at least a 5 percent owner of the business that adopted the 401(k) plan.

[Guest rmdquestion]

Thanks for the replies.

Appleby - After discussing this issue with many people, most all are in agreement that the IRA custodians did the right thing. Do you have any cites for your last answer regarding no RMD's need to be taken from the 401(k) Plan?

I would tend to agree with you that once the money is rolled into the 401(k) plan it becomes subject to the 401(k) distribution rules including RMD rules which state that I don't have to take distributions until April 1st following the calendar year of my termination date. But, the last thing I want is the IRS to audit and claim the opposite is true and claim that I have an excise tax due. I want something in hand to show them how I arrived at my position.