RMD? age 75, non-owner, terminates 2006, r/o 2006

[himt4]

2/5/07

Someone didn't like my answer to this question. So I am posting the question here to either validate my opinion or to be corrected. I am sure that similar questions have been asked here before. I will give the facts with out my opinion so as not to be accused of "leading the witness":

"Dan" is 75 year old non-owner who is an active employee in a company and has a 401K account balance in that company's 401k plan. Document allows non-owner active employees to be exempt from RMDs. Dan has never taken a RMD from this 401k plan.

Dan retires (terminates employment) in July 2006. Dan Rolls over his entire account balance to an IRA in August 2006.

Question: what is Dan's RMD situation???

[jevd]

Required Beginning Date = 4-1-07 The later of 4-1- of the year participant turns 70 1/2 or retires from employer.

FROM !.401(a)(9)

2.2 Q-2. For purposes of section 401(a)(9)©, what does the term required beginning date mean?

A-2. (a) Except as provided in paragraph (b) of this A-2 with respect to a 5-percent owner, as defined in paragraph © of this A-2, the term required beginning date means April 1 of the calendar year following the later of the calendar year in which the employee attains age 70½ or the calendar year in which the employee retires from employment with the employer maintaining the plan.

(b) In the case of an employee who is a 5-percent owner, the term required beginning date means April 1 of the calendar year following the calendar year in which the employee attains age 70½.

© For purposes of section 401(a)(9), a 5-percent owner is an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70½.

(d) Paragraph (b) of this A-2 does not apply in the case of a governmental plan (within the meaning of section 414(d)) or a church plan. For purposes of this paragraph, the term church plan means a plan maintained by a church for church employees, and the term church means any church (as defined in section 3121(w)(3)(A)) or qualified church-controlled organization (as defined in section 3121(w)(3)(B)).

(e) A plan is permitted to provide that the required beginning date for purposes of section 401(a)(9) for all employees is April 1 of the calendar year following the calendar year in which an employee attains age 70½ regardless of whether the employee is a 5-percent owner

Complete Regs HERE

[himt4]

OK, jevd, you've established the RMD is 4/1/07 in Dan's situation.

So, you've answered WHEN.

Please post an answer to WHERE (as in "from where")

[jevd]

OK, jevd, you've established the RMD is 4/1/07 in Dan's situation.

So, you've answered WHEN.

Please post an answer to WHERE (as in "from where")

The complete rollover created an excess contribution in the IRA for 2006 IN the amount of the RMD.

The RMD Should have been retained before the rollover. It now must be removed as an Excess Plus earnings from the IRA before tax filing date for the year of the rollover.If removed after tax filing date + extensions, a 6% penalty will apply for each year it remains in the IRA. The 2006 1040 must be completed showing the RMD amount as taxable on line 16 b.

[himt4]

"The RMD Should have been retained before the rollover"

Yep, that's the answer I gave.

So, is there a 50% excess tax imposed since a RMD was supposed to be taken from the 401(k) plan and was not?

[jevd]

"The RMD Should have been retained before the rollover"

Yep, that's the answer I gave.

So, is there a 50% excess tax imposed since a RMD was supposed to be taken from the 401(k) plan and was not?

NO. The full amount was withdrawn from the 401(k) which satisfied the RMD. However the complete rollover created the excess in the IRA which needs to be corrected by tax filing date plus extensions to avoid the 6% excise tax penlty.

An approved extension is not needed to make this correction.

[himt4]

Thanks jevd. I definitely agree with you about the date and that the RMD should have been retained before the Rollover.

My instinct is that there technically would be a 50% excise tax. You seem to be pretty up on this so you're probably correct about it. I just seem to remember as a rule of thumb that RMDs must be taken individually from each and every pension plan in which they are due (as opposed to IRAs where you can add them all together, figure out the RMD due, and take that amount from one IRA if you like). So if we've established that a RMD was due from the 401k plan, I just don't see how rolling over the 401K plan into an IRA translates into "satisfied the RMD" from the 401k plan. Doesnt it have to be withdrawn directly to oneself to satisfy the RMD?

[jevd]

Thanks jevd. I definitely agree with you about the date and that the RMD should have been retained before the Rollover.

My instinct is that there technically would be a 50% excise tax. You seem to be pretty up on this so you're probably correct about it. I just seem to remember as a rule of thumb that RMDs must be taken individually from each and every pension plan in which they are due (as opposed to IRAs where you can add them all together, figure out the RMD due, and take that amount from one IRA if you like). So if we've established that a RMD was due from the 401k plan, I just don't see how rolling over the 401K plan into an IRA translates into "satisfied the RMD" from the 401k plan. Doesnt it have to be withdrawn directly to oneself to satisfy the RMD?

My understanding is that as long as the 1099R from the 401(k) indicates that it was withdrawn, then the RMD is satisfied. BTW was this a direct rollover or was the distribution received by the plan participant?

I don't think it matters but that may be where the confusion is regarding the 1099R coding. Maybe someone else can chime in on the discussion with a different point of view. Ultimately the individual should get a professional's advice.

[himt4]

the full 401k amount was directly rolled over from 401k to an IRA.

And yes, anyone else who wants to chime in, please do so.

[jevd]

the full 401k amount was directly rolled over from 401k to an IRA.

And yes, anyone else who wants to chime in, please do so.

The trustee/plan administrator, should have known better and should have distributed the RMD separately. I still don't think the 50% penalty applies. The individual should remove the amount + earnings from the IRA and that should be the end of it. He/she will be due another RMD in 2007 from the IRA.

[himt4]

To say that the RMD should have been distributed from the 401(k) plan but that there is no 50% penalty if you ultimately take it from the IRA, is essentially saying that you do not need to take it from the 401k plan.

Doesn't feel right. Anybody else want to make comment?

[jevd]

To say that the RMD should have been distributed from the 401(k) plan but that there is no 50% penalty if you ultimately take it from the IRA, is essentially saying that you do not need to take it from the 401k plan.

Doesn't feel right. Anybody else want to make comment?

The IRS doesn't care how its distributed, just that it is distributed. The Rollover rules then kick in and say you can't Roll an RMD. that's why I don't think the 50% penalty applies.

[Bird]

I agree with jevd. The RMD part of the account should not have been rolled over, but it was in fact distributed from the plan so there's no excise tax. The participant just takes the excess out and everyone is happy.

[John Feldt ERPA CPC QPA]

Would the answer change if the funds stayed entirely in the 401(k) plan through the end of 2006, and was just now rolled over with no RMD being made?

[jevd]

Would the answer change if the funds stayed entirely in the 401(k) plan through the end of 2006, and was just now rolled over with no RMD being made?

Yes,

Then potentially a 50% penalty could apply but the IRS has the authority to waive the penalty on a facts and circumstances basis depending on how the situation is corrected etc. How ever as this is the first year, there is no penalty applied until after 4/1/07.

The plan could also be subject to operational failures as well.