RMD from 401k with Roth and Pre-Tax balances

[Dennis Povloski]

If a participant has a pre-tax deferral balance and a Roth deferral balance in his 401k plan account and is required to take an RMD, can the participant choose to take the Roth money first?

Assuming that the funds have been in there for 5 year and is a qualified distribution, there would be no tax due on the Roth balance, right?

[Lou S.]

It must be pro-rated

[Kevin C]

What does the plan say? Our VS documents allow several choices for distribution ordering between pre-tax deferral and Roth accounts for distributions from deferral accounts. One of the options is to let the participant decide.

[Tom Poje]

correct, no tax on the Roth if it has been there 5 years

going forward, one suggested strategy is to roll the Roth into a Roth IRA because there are no minimum distributions from Roth IRAs (at least at the moment) that would reduce the min distribution in future years.

[JPIngold]

Wondering if anyone has more clarification on this issue after a year and a half. Lou S says you must prorate. Kevin C says check the plan.

I can find nothing in my research which is black and white. My VS document, in the "in-service distribution" language states "Procedures to implement in-service distributions. The Employer and the Administrator may adopt a procedure to implement the in-service withdrawal provisions, applied on a uniform and consistent basis to all Participants. For example, when more than one Account is available for distribution (e.g., both pre-tax Elective Deferrals and Roth Elective Deferrals), a procedure may be implemented setting forth the order in which Accounts are accessed to make up such withdrawal, or it may provide Participants with the ability to request that the amount withdrawn come from particular accounts.

There is nothing in the RMD section of the document addressing it. The participant in my case is retired and turned 70-1/2 earlier this year so this is an RMD and not an in-service distribution. Do you feel I can use this provision to allow the employer to adopt a procedure enabling participants to specify which account each distribution is from whereas to enable the following process:

• Defer her first RMD until early in 2018;
• Assuming she would like to avoid using the Roth for estate purposes and not take any withdrawals from it, have her take her 1st and 2nd RMD's in early 2018 and elect them to be all from the pre-tax accounts (knowing she will be in a low tax bracket)
• Immediately thereafter, roll 100% of her Roth account to a Roth IRA to avoid future RMD's from the Roth account.
• Retain the pre-tax money in the plan and continue taking RMD's in 2019.

Obviously this will not work if things have to be pro-rata as (1) part of the first two RMD's would have to be Roth and (2) you couldn't roll just the Roth account to a Roth IRA ---- you would have to roll both to respective traditional and Roth IRA's.

Thoughts? Thanks.

James

 

[RatherBeGolfing]

1 hour ago, JPIngold said:

Wondering if anyone has more clarification on this issue after a year and a half. Lou S says you must prorate. Kevin C says check the plan.

I can find nothing in my research which is black and white. My VS document, in the "in-service distribution" language states "Procedures to implement in-service distributions. The Employer and the Administrator may adopt a procedure to implement the in-service withdrawal provisions, applied on a uniform and consistent basis to all Participants. For example, when more than one Account is available for distribution (e.g., both pre-tax Elective Deferrals and Roth Elective Deferrals), a procedure may be implemented setting forth the order in which Accounts are accessed to make up such withdrawal, or it may provide Participants with the ability to request that the amount withdrawn come from particular accounts.

There is nothing in the RMD section of the document addressing it. The participant in my case is retired and turned 70-1/2 earlier this year so this is an RMD and not an in-service distribution. Do you feel I can use this provision to allow the employer to adopt a procedure enabling participants to specify which account each distribution is from whereas to enable the following process:

• Defer her first RMD until early in 2018;
• Assuming she would like to avoid using the Roth for estate purposes and not take any withdrawals from it, have her take her 1st and 2nd RMD's in early 2018 and elect them to be all from the pre-tax accounts (knowing she will be in a low tax bracket)
• Immediately thereafter, roll 100% of her Roth account to a Roth IRA to avoid future RMD's from the Roth account.
• Retain the pre-tax money in the plan and continue taking RMD's in 2019.

Obviously this will not work if things have to be pro-rata as (1) part of the first two RMD's would have to be Roth and (2) you couldn't roll just the Roth account to a Roth IRA ---- you would have to roll both to respective traditional and Roth IRA's.

Thoughts? Thanks.

James

 

Your document most likely covers it (either by telling you how you must do it or by giving the admin discretion), but it may not be where you think it should be.   In my document, the ordering rule is not in the RMD section, it is in a section that deals with timing and form of distributions.

[Tom Poje]

The ERISA Outline book has the following note:

chapter 6, section VII part D.2.e.6

Roth accounts....separate account requirement is necessary for the tax rules that apply to distributions from Roth accounts....However, there is no language in IRC section 402A to treat the Roth account separate form the rest of the participant's account balance. Thus, the Value of the Account Balance will include the designated Roth account.

.........

so using that logic, step 1. determine min distribution, take the total account balance including roth

now you know how much the minimum is.

after that, there appears to be no requirement for 'separate' accounting

by the way, can you imagine the fun if you applied separate accounting to all accounts?

I have to take $500, but I am 0% vested in match so I really take less because I'm not entitled to some of that due to vesting.

part of the problem, I think, arises from the fact if you have after tax balance they are suppose to be done pro rate when you get distributions. and obviously Roth is a type of after tax. but it isn't quite the same. I recall a few years ago at an ASPPA conference some asked about running an ADP test and using Comp less deferrals, which, as such, was testing on 'taxable income'. so do you treat Roth the same way. the IRS response was  something like, well the intent is to exclude all deferrals, so don't worry about it of course such responses might not actually reflect an actual treasury position, but as far as I know everyone subtracts all deferrals.

[Belgarath]

And just for additional EOB reference, which will also give you an example, the 2017 EOB also says, in Chapter 11, page 11.687, that it should be possible for an employee to designate whether the required minimum distribution being made for a calendar year is attributable to the Roth portion or the non-Roth portion of his/her account balance.

 

[JPIngold]

Thanks everyone!!!