RMD Question

[Mr401k]

Owner of the company is well beyond 70½. Each year he makes a large Roth deferral into 401k plan and immediately rolls the full Roth balance to his Roth IRA. He has a small pretax balance that remains in the plan from year to year; his RMD is based on that alone, since each January 1 it is the only balance in his account.

When the rollover is processed, most of the Roth balance does go the Roth IRA, but the RMD for the year is deducted (from the Roth balance) and a check sent to him. The pretax balance that remains would have been much more than enough from which to take RMD later in the year.

Do regs require that his first distribution(s) in a year be treated as RMD, until RMD is satisfied?

Thanks

[BG5150]

Do the seasoning rules apply at all here?

Why does he even keep the pre-tax money in there? Move it now, and there's only the '14 RMD to worry about and then nothing more.

[GMK]

Sorry, but I don't get it. Is there some reason he couldn't delay the Roth rollover until "later in the year," meaning do the Roth rollover after taking the RMD from the pretax balance?

[BG5150]

Sorry, but I don't get it. Is there some reason he couldn't delay the Roth rollover until "later in the year," meaning do the Roth rollover after taking the RMD from the pretax balance?

I think they were doing it to avoid as much taxes as they could.

[masteff]

Do regs require that his first distribution(s) in a year be treated as RMD, until RMD is satisfied?

Yes. But although I'm certain the Service would have a cow if it technically was the 2nd distribution just so it was done.

[GMK]

Thanks, BG. I think I get it. The Roth part was already taxable, and they didn't want to add more taxable income by doing the RMD from the pretax part.

So, that's their choice, and they get RMD's for perpetuity as a result.

From the OP, it sounds like they may be rethinking it, and who knows what they'll do next year.

[My 2 cents]

I may be confused, but wasn't the whole idea behind there being such things as RMDs to force people to take taxable distributions? How would deferring receipt of pretax funds and trying to satisfy RMDs by taking (non-taxable) withdrawals from Roth accounts satisfy the law's objectives? Wouldn't the law call for separate RMDs from a regular IRA or 401(k) account and from a Roth account?

Are there RMDs under Roth accounts? If so, wouldn't he have to take an RMD from the Roth plan as well as from the pre-tax funds in the 401(k)?

[GMK]

RMD rules apply to a Roth 401(k) (but not to a Roth IRA while the owner is alive).

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions

[Mr401k]

Yes, RMD rules don not apply to IRA...that's why he makes Roth deferrals and then rolls those dollars to his Roth IRA, The Roth dollars are never in his plan account on January 1, so he never has RMD based on them.

[GMK]

Do regs require that his first distribution(s) in a year be treated as RMD, until RMD is satisfied?

From your original post, it sounded like you were interested in taking the RMD from the pretax account, maybe later in the year, and not from the Roth money.

And yes he can, by taking the RMD from the pretax account before doing the Roth rollover. This, of course, will increase his taxable income for the year. If his taxable income will be down a tax bracket in retirement, it's probably wise to just keep doing what he's doing. On the other hand, putting all he can into the Roth (by taking the RMD from the pretax funds) is a good idea for retirement, too. Just gotta figure out which option he likes better.

It probably doesn't matter in this case, but the RMD is based on the balance on December 31 of the previous plan year, not January 1 of this year.

[Mr401k]

The distribution has now been processed from the Roth source; RMD was deducted and a check mailed, with the remainder rolled to the Roth IRA. Do regs allow the RMD to be re-characterized as having come from the pretax source, and that amount of Roth dollars restored to the account?