RMD for owners

[pmacduff]

I know this has been discussed previously, but I cannot find a thread exactly on point. Here's the situation:

Small Company with owner and spouse on payroll.

RMD for both for 2011 is due by 12/31/2011.

Plan allows for in-service distributions after 59 1/2.

Owner is transitioning the business to his son so he and the spouse rolled the majority of their accounts out of the Plan and into IRA accounts last month.

It seems to me that the RMDs for 2011 should have been made from the accounts before the rollover was done. I know that if they retired then the RMDs should have been made before the rollover, but what about these 2 owners who are still on payroll and will still be making contributions to their plan accounts? I think the broker planned on making the RMDs from the IRA accounts.

At this time there is not enough in the plan accounts to process the minimums and I'm not sure if they will have enough by the end of the year.

Thoughts?

[Guest Sieve]

Did owners reach age 70-1/2 in 2011? If so, they must received an MRD, even if still on the payroll, and any distribution in an MRD year must first be applied towards the MRD--i.e., the MRD already has occurred, and the full amounts distributed & rolled into the IRAs are not eligible to be rolled over (and the qualified plan must issue 1099s taking into account that some of the distribution represented an MRD).

Does Treas. Reg. Section 1.401(a)(9)-7, Q&A-1 (with Treas. Reg. Section 1.402©-2, Q&A-3) answer your question?

[GMK]

I agree that the RMDs should have been done before the rollover. In a year in which an RMD is required, the first moneys distributed are deemed to be the RMD (and cannot be rolled over).

If memory serves, a previous thread discussed telling the IRA that part of the rollover was RMD money in order to get that money back from the IRA and distribute it to the participant.

edit to add previous threads:

http://benefitslink.com/boards/index.php?showtopic=46594

http://benefitslink.com/boards/index.php?showtopic=47337

Hope it helps.

[pmacduff]

Thank you both.

No Sieve - 2011 is not the first year for minimums I think they began RMDs in 2007 or 2008.

This was the first circumstance I have had where the owners are continuing to work as opposed to actually retiring and having to take the RMD out before the rollover.

I agree in reading through the previous threads and the regs, the minimum is required prior to rollover.

I will contact the client and the broker and see what we can do to fix this issue.

[Bird]

I think the fix here is to issue 2 1099-Rs from the plan, one for the RMD as a Code 7 (taxable) and the rest as a rollover (G or H or whatever it is these days).

Then the IRA custodian is told that the RMD portion is ineligible for rollover and they disgorge it (non-taxable).

(FWIW I (still) believe that if there was enough left in the plan to satisfy the RMD, you could just distribute it now. I agree that technically the first dollars out are not eligible for RO but it's not like the IRS is going to check the dates of the payouts; they would just want to be sure the RMD was done. But that's not the issue here at all, I mention it because that was in the prior threads.)

[pmacduff]

Yes Bird, I agree. The account for the wife probably has enough to process out her RMD. But the owner's balance is substantial and he does not have enough left in there to satisfy the necessary RMD amount. The broker on the plan also handles the personal investments, so the fix should be (hopefully) relatively simple to process.

[ESOP Guy]

Yes Bird, I agree. The account for the wife probably has enough to process out her RMD. But the owner's balance is substantial and he does not have enough left in there to satisfy the necessary RMD amount. The broker on the plan also handles the personal investments, so the fix should be (hopefully) relatively simple to process.

The hard part will be to get the IRA company to NOT issue another 1099. That in the end is what I have found to be the the pain. Most IRA companies basic default position is any money leaving an IRA is a 1099 event. And while the broker might want to do it right he is most likely not in charge of the 1099 being issued. It is the company that he works for or uses to clear his accounts. So take this from somone who has been there and done that..

Have a long talk with the broker about the 1099 issue and make sure it gets done right up front. You don't want to be running around next Jan when the 1099 comes in the mail trying to fix it.

[mbozek]

Yes Bird, I agree. The account for the wife probably has enough to process out her RMD. But the owner's balance is substantial and he does not have enough left in there to satisfy the necessary RMD amount. The broker on the plan also handles the personal investments, so the fix should be (hopefully) relatively simple to process.

The hard part will be to get the IRA company to NOT issue another 1099. That in the end is what I have found to be the the pain. Most IRA companies basic default position is any money leaving an IRA is a 1099 event. And while the broker might want to do it right he is most likely not in charge of the 1099 being issued. It is the company that he works for or uses to clear his accounts. So take this from somone who has been there and done that..

Have a long talk with the broker about the 1099 issue and make sure it gets done right up front. You don't want to be running around next Jan when the 1099 comes in the mail trying to fix it.

Esop guy: Its a waste of time to discuss 1099 issue with broker because broker has no control over how distribution from the IRA will be reported. Distribution reporting is handled in another department. Best solution is to roll the amount needed for the MRD back to the plan which will make the MRD.