Must a RMD be withheld at termination and rollover?

[K-t-F]

A participant is 75 and retireing. She has not taken any RMDs to date as she has not been required to because she is a simple rank and file employee. When she leaves she wants to rollover her complete balance to an IRA.

When we pay this employee out and roll her money into an IRA must we process an "RMD" , withhold taxes, and generate a 1099R for the RMD from the plan... then rollover her balance to her IRA? Or can we pay her out in full as a rollover and code the 1099R as such and be done? Dont go through the whole RMD exercize?

[pmacduff]

Even if the plan allows for delay of RMD until year of retirement the RMD is still required in that year for the rank and file participants.

[K-t-F]

So the plan is required to create the RMD.

[austin3515]

yes, the RMD is required. The RMD is delayed until the year of retirement., Now that the day has come she is longer exempt. The explanation is that she is due to take a 2015 RMD. If she rolls to the IRA without taking the RMD first, she will never take her 2015 RMD because the IRA RMD is determined (as in the 401k plan) based on the 12/31/2014 balance. And that figure in the IRA was zero.

[My 2 cents]

It is my understanding that she must pay taxes (ordinary income) on the MRD. I don't think she can put it into a standard IRA - every year, she will owe taxes on any investment income generated by those funds. What would be the advantage to trying to put the entire amount into an IRA? I don't think it is permissible.

Are you asking whether you (in distributing her account) are permitted to not perform the necessary calculations to identify the portion that is the RMD and to handle it accordingly? If so, I am pretty sure the answer is that you must identify how much of the distribution is an RMD and to report it on a separate 1099-R as ordinary income (in addition to a 1099-R reporting the rest as a direct rollover to an IRA). I don't think you can then send the whole amount to an IRA for investment there. But I don't usually get involved with IRA issues, so don't take my word for it.

[K-t-F]

That is the explaination I was looking for and that was my concern. Uncle Sam wants an RMD and taxes to be paid. Upon her retirement her exemption is over and an RMD is required. AND... it must come from the plan... Correct?

• I will calculate the RMD, report ordinary income and withhold taxes. code that 1099R as normal dist
• I will then rollover the remaining amount, not withhold taxes, code that 1099R a rollover

Thanks

[austin3515]

The RMD is ineligible for rollover. The amount is not permitted to go to an IRA. So her account is $100,000. $97,500 can be rolled over and her RMD of 2,500 (no I did not look up the factor) is paid as a cash distribution.

She may or may not be eligible to make a traditional IRA contribution in the amount of $2,500. Perhaps that will get you where you want to be.

[K-t-F]

Yes Austin... that is what I understood.

Example:

100K account balance

20K RMD (4K taxes + 16K cash dist)

80K rollover to IRA

Thanks, case closed

[austin3515]

ok, case closed, but that RMD means your participant is 104! Tell him to take the money and buy a new car, he deserves it!

[My 2 cents]

Yes Austin... that is what I understood.

Example:

100K account balance

20K RMD (4K taxes + 16K cash dist)

80K rollover to IRA

Thanks, case closed

The withholding on the RMD is not required to be 20% of the distribution. That is for distributions eligible for rollover that are not rolled over (not RMDs). May be 10% as a default. The participant can submit a W-4P form to direct a specific amount for withholding. The participant should try to anticipate how much will be owed as taxes and have that amount withheld.