401(a)9 - Required Minimum Distribution for 5% Business Owner

[Guest sbrownlow]

Question: What are the required minimum distribution requirements for a 5% business owner who retires from the 401(k) Plan at age 70 ½ during the 2004 calendar year and is requesting a transfer from the Plan to an IRA?

We are trying to determine if the 5% business owner who turned age 70 ½ in the calendar year 2004 is required by law to complete his RMD before transferring his account balance to an IRA. The business owner would like to transfer 100% of his 401(k) account balance to an IRA during the 2004 calendar year and delay taking his RMD from the IRA until April 1, 2005. We believe 401(a)9 may require an RMD to be completed prior to the transfer of the 401(k) account balance to an IRA.

Please advise or comment.

[Lynn Campbell]

I think he needs to take the Required Minimum Distribution before he does the rollover, because 2004 is his first distribution calendar year.

[jquazza]

Agree with LC, remember, RMDs are not eligible for rollover.

[mbozek]

I presume he wants to delay because he will be in a lower tax bracket next year when he is required to receive MRDs for both 04 and 05. If his tax bracket will not be reduced by deferring to 05 there is no reason to defer the 04 payment of the MRD for 5 months. I think the a31 regs require that he must receive the MRD as a separate payment subject to 20% withholding but he could rollover the payment to an IRA until 4/1/05 if he can find a custodian who will accept the funds.

[Blinky the 3-eyed Fish]

The (a)(9) regs are clear that the first payments made for a person subject to RMD's are to satisfy the RMD. So, even though there is the delay to 4/1 for the first year, the participant is still required to take the RMD first if any distribution is made during the year in which they turn 70.5. They are not eligible for rollover or delay until 4/1. I'd give you the exact cite, but I am out the door. It's one of the Q&A's though.

[mbozek]

SBrownlow: Why cant the owner delay the rollover until 1/1/05 and take the MRD in 05 if he wants to be in a lower tax bracket? Otherwide it doesnt matter whether he receives the MRD in 04 or 05.

[Blinky the 3-eyed Fish]

I was off on my cite. Here it is 1.402©-2 Q&A 7.

Q-7. When is a distribution from a plan a required minimum distribution under section 401(a)(9)?

A-7.

(a) General rule. Except as provided in paragraphs (b) and © of this Q & A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a) (9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies. If the total section 401(a)(9) required minimum distribution for a calendar year is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required minimum distribution.

Mbozek, one typical answer would be that if an small business owner is rolling over his balance into an IRA, that can typically mean the plan is terminating as well. To save adminstrative costs for another plan year they often try to get the money out before the end of this plan year.

[Appleby]

mbozek, I think you meant to say "MRD as a separate payment not subject to 20% withholding" right?

[Guest Gordy]

Blinkey-I agree with your last paragraph, however if there is not plan termination is Mbozek correct? Can the first distribution be delayed and all assets be rolled over to and IRA. All assets can be rolled because there is no distribution due from the plan based on the election to delay. First distribution is added to second years comming out of the IRA.

[Blinky the 3-eyed Fish]

Gordy, no that would not be correct because the rollover to the IRA would constitute a distribution from the plan. See the first sentence of the cite. The fact that a plan is terminating is immaterial for the rule.

I think you might be hung up as to what calendar year the MRD is due. The answer is that the MRD is due in the year one turns 70.5. There just happens to be the special rule allowing delays until the 4/1 following for the first payment. Try re-reading the cite knowing that the MRD is for 2004 and I think it's clear that the first distributions for 2004 are considered MRD's and cannot be rolled over.

[mbozek]

Moving the mrd to 05 would put the employee in a lower tax bracket (by distributing the payment by 4/1) than he would be in if the mrd was received in 04. The 04 mrd cannot be rolled over an IRA if received in 05 instead of 04. The balance of the distribution can be rolled over to an IRA and the 05 mrd must be taken by 12/31/05.

[Guest Gordy]

Thanks blinky. I was looking at the year it was due.

[Appleby]

mbozek

I agree that the 04 RMD cannot be rolled to an IRA if received in 05 instead of 04. But then, it still cannot be rolled to an IRA if it is received in 04.

If the example that stemmed the question, the business owner must distribute the RMD before rolling over the balance to the IRA.

If the rollover occurs in 2004, the 2004 RMD must be distributed before the rollover occurs.

If the 2004 RMD is delayed until 2005, and the rollover occurs in 2005, both the 2004 and the 2005 RMD must be distributed from the plan before the balance is rolled to the IRA.

Failure to distribute the RMD before the rollover will result in an ineligible rollover to the IRA (the ineligible rollover amount being the RMD amount), which is subject to correction by removing the RMD amount from the IRA as a return of excess contribution.

See Blinky’s cite above

[mbozek]

Why cant he withdraw the mrd for 04 on 4/1/05 and then rollover the remaining balance to an IRA on 12/31/05 after taking the 05 mrd on that date?

[Appleby]

He can definately do that- because he would have satisfied the RMD prior to the rollover

[Blinky the 3-eyed Fish]

He can.