RMD due date when rolling over account

[Santo Gold]

A non-key employee is still employed at her company that has a 401k plan.  She turned 70-1/2 in 2017 and would have been due her initial RMD 4/1/18.  But, since she is still employed, chose not to take that.

Given her age, the plan allows for her to take all of her money out of the plan as an ISW.

Although still employed, she wants to roll all of her money out of the 401k plan and into an IRA before the end of 2018.  She would like to avoid taking an initial RMD from these assets until 2019.  

If she were to transfer the plan assets to an IRA before the end of 2018, would she then be required to take a 2018 RMD from the IRA or could that be delayed until 2019?

Thank you

 

[ESOP Guy]

Assuming she puts the money into an IRA that had no other assets in it until this rollover it is 2019.  Any 2018 RMD from the IRA is based on the balance at 12/31/2017 which would be zero-so the RMD is zero.  

The other catch is she can not terminate employment during 2018.  The moment she does that there would need to be an RMD from the 401(k) plan even if there is no cash in it at the time.  

[chc93]

1 hour ago, ESOP Guy said:

...

The other catch is she can not terminate employment during 2018.  The moment she does that there would need to be an RMD from the 401(k) plan even if there is no cash in it at the time.  

In that case, the 2018 RMD amount will be an excess contribution in the IRA, which has to be removed from the IRA by the end of 2018.

[CuseFan]

Why on earth would she do this - create an RMD situation when none exists? Unless she wants/needs only some of her 401(k) funds but her plan only has a (total) lump sum option. 

[Larry Starr]

11 hours ago, Santo Gold said:

A non-key employee is still employed at her company that has a 401k plan.  She turned 70-1/2 in 2017 and would have been due her initial RMD 4/1/18.  But, since she is still employed, chose not to take that.

Given her age, the plan allows for her to take all of her money out of the plan as an ISW.

Although still employed, she wants to roll all of her money out of the 401k plan and into an IRA before the end of 2018.  She would like to avoid taking an initial RMD from these assets until 2019.  

If she were to transfer the plan assets to an IRA before the end of 2018, would she then be required to take a 2018 RMD from the IRA or could that be delayed until 2019?

Thank you

 

Are you assuming that, if she did this, she would NOT have to take an RMD in 2018 FROM THE PLAN?  Well, she would. You can only ignore the RMD if you continue working IF you do not take any distribution from the plan. A rollover to an IRA is a distribution.

The 2019 RMD would be taken from the IRA based on the 12/31/18 value in the IRA which now no longer includes the 2018 RMD.

[C. B. Zeller]

Larry,

Not to doubt you, but can you provide a cite? Required beginning date is pretty clearly defined for a non-5% owner as April 1 of the calendar year following the year in which the participant turns 70-1/2, or retires. It doesn't make any reference to when pre-retirement in-service withdrawals begin.

If the participant is not yet retired as of 12/31/2018, then her RBD would not be 4/1/2019, and therefore 2018 would not be a distribution calendar year, and therefore the distribution taken in 2018 would not have to comply with 401(a)(9).

[Doc Ument]

Treasury Regulation 1.402(c)-2, Q&A 7 states that the first money out of a qualified plan during the calendar year in which the participant attains age 70 1/2 is not eligible for rollover (until the RMD for that calendar year is reached) (even though the participant is able to wait until the next 4/1 if no money is taken until then).

[Larry Starr]

6 hours ago, C. B. Zeller said:

Larry,

Not to doubt you, but can you provide a cite? Required beginning date is pretty clearly defined for a non-5% owner as April 1 of the calendar year following the year in which the participant turns 70-1/2, or retires. It doesn't make any reference to when pre-retirement in-service withdrawals begin.

If the participant is not yet retired as of 12/31/2018, then her RBD would not be 4/1/2019, and therefore 2018 would not be a distribution calendar year, and therefore the distribution taken in 2018 would not have to comply with 401(a)(9).

I wish I could provide the cit; I'm actually stuck in Amsterdam due to a medical issue and, obviously, don't have resources to consult.  I think I have it right, but I hope someone else can find the chapter and verse for which way it is.

[Larry Starr]

1 hour ago, Doc Ument said:

Treasury Regulation 1.402(c)-2, Q&A 7 states that the first money out of a qualified plan during the calendar year in which the participant attains age 70 1/2 is not eligible for rollover (until the RMD for that calendar year is reached) (even though the participant is able to wait until the next 4/1 if no money is taken until then).

Bingo!  Thank you.

[Luke Bailey]

Larry's usually right, so maybe has a cite. But Treas. reg. 1.401(a)(9)-5, Q&A-1(b) seems to say that if she is not a 5% owner and does not retire until 2019, 2019 is her first minimum distribution calendar year.

[Luke Bailey]

I think to be in 1.402(c)(2) Q&A-7 you have to have an RMD for the year. 1.401(a)(9)-5, Q&A-1(b) would seem to say you don't have an RMD here in 2018.

[RatherBeGolfing]

Here is what the EOB says

RMD has to be taken out if it is a required distribution year.  Since she is still employed, an RMD is not required for 2018.  If she terminates during 2018 after the distribution has been made, 2018 will become a required distribution year, with no assets left to make the RMD.  If that happens, the distributing plan is still treated as having satisfied its minimum distribution requirements, but the the recipient plan will have received an invalid rollover amount.

Quote

Chapter 6 - Section VII – Part G

3. Effect of rollover on distributing plan’s calculation of the minimum distribution. When an amount is distributed from a plan in a rollover transaction, that amount is still treated as a distribution in determining whether the distributing plan has satisfied its minimum distribution requirements. See §1.401(a)(9)-7, Q&A-1, of the 2002 and 2001 Regulations and §1.401(a)(9)-1, Q&A G-1, of the 1987 Regulations. However, if the amount rolled over includes all or a portion of the minimum distribution from the distributing plan, the recipient plan will have received an invalid rollover amount. IRC §402(c)(4)(B) precludes the rollover of amounts that are required to be distributed under the minimum distribution rules. See Treas. Reg. §1.402(c)-2, Q&A-7, and the discussion in 5. below regarding the calculation of the amount that is ineligible for rollover.

3.a. All amounts distributed during year are ineligible for rollover until minimum distribution is satisfied. Any distributions in a year in which the participant is required to receive a minimum distribution (i.e., a distribution calendar year) are treated first as satisfying the required minimum distribution for that year and, thus, are ineligible for rollover until the required distribution for such year is satisfied. See Treas. Reg. §1.402(c)-2, Q&A-7. This is true for distributions made in the first distribution calendar year, even though such distributions are not required to be paid until the RBD. Treas. Reg. §1.408-8, Q&A-4, provides that the same rule applies to distributions made from IRAs within a distribution calendar year.

3.a.1) Caution: nonperiodic payments received during or after the first distribution calendar year. The issue addressed in 3.a. above generally arises when a nonperiodic payment is made in the participant’s first distribution calendar year or in a later year. This is because periodic payments are generally calculated in a manner that will render the payments ineligible for rollover anyway under the eligible rollover distribution definition in IRC §402(c)(4)(A). Plan administrators should be careful particularly in two types of situations: (1) when a participant is electing a lump sum distribution in the calendar year in which the participant has attained age 70½ or in a later calendar year, and (2) when a participant is taking a nonperiodic withdrawal of a portion of his/her accrued benefit in the calendar year in which he/she has attained age 70½ or in a later calendar year. If, under either situation, the calendar year of the distribution is a distribution calendar year under the minimum distribution rules, then the distributing plan should make sure that it does not rollover any portion of the distribution that represents the minimum distribution for that year, even if the distribution is made before the RBD. If all or any portion of the minimum distribution amount is rolled over, the distributing plan has still satisfied the §401(a)(9) requirements (see 3. above and 3.b. below), but the receiving plan may not treat such amount as a rollover contribution (see 3.c. below).

 

[RatherBeGolfing]

40 minutes ago, Larry Starr said:

I wish I could provide the cit; I'm actually stuck in Amsterdam due to a medical issue and, obviously, don't have resources to consult.  I think I have it right, but I hope someone else can find the chapter and verse for which way it is.

Hope you  are doing ok over there Larry.

[Appleby]

On 9/21/2018 at 2:41 PM, chc93 said:

In that case, the 2018 RMD amount will be an excess contribution in the IRA, which has to be removed from the IRA by the end of 2018.

Actually,   by her 2018 tax filing due date, plus extensions ( as a return of excess)

[Appleby]

19 minutes ago, RatherBeGolfing said:

Here is what the EOB says

What's an EOB?

[RatherBeGolfing]

@Appleby The ERISA Outline Book by Sal Tripodi

[Appleby]

1 minute ago, RatherBeGolfing said:

@Appleby The ERISA Outline Book by Sal Tripodi

Thank you

[chc93]

5 hours ago, Appleby said:

Actually,   by her 2018 tax filing due date, plus extensions ( as a return of excess)

Thank you very much for the correction and clarification.

[Santo Gold]

Thank you for the great replies.  

[CJ Allen]

I agree, the RMD wouldn't be applicable until the participant met the RMD requirements of the plan & regulations.  The plan still must allow the deferral to retirement (some plans opted to remain under the age 70 1/2 rules regardless of the new rules).  If the plan document uses the pre-2002 RMD language, the deferral of RMD until retirement wouldn't apply.

One situation I've seen for this type of rollover to IRA is in the instance the only distribution option allowed is a total distribution with no exceptions.  I've seen quite a few plan documents with the total distribution option, with no RMD alternative language (some providers still distribute installments not otherwise available under the plan).  The participant may want to begin distributions in an annuity option that may not be available under the plan.

[Larry Starr]

1 hour ago, CJ Allen said:

I agree, the RMD wouldn't be applicable until the participant met the RMD requirements of the plan & regulations.  The plan still must allow the deferral to retirement (some plans opted to remain under the age 70 1/2 rules regardless of the new rules).  If the plan document uses the pre-2002 RMD language, the deferral of RMD until retirement wouldn't apply.

One situation I've seen for this type of rollover to IRA is in the instance the only distribution option allowed is a total distribution with no exceptions.  I've seen quite a few plan documents with the total distribution option, with no RMD alternative language (some providers still distribute installments not otherwise available under the plan).  The participant may want to begin distributions in an annuity option that may not be available under the plan.

What?

"I agree, the RMD wouldn't be applicable until the participant met the RMD requirements of the plan & regulations."

Of course that's true. The question being posed is what are those rules and how do they apply in a particular situation.  

[Bird]

23 hours ago, RatherBeGolfing said:

Here is what the EOB says

RMD has to be taken out if it is a required distribution year.  Since she is still employed, an RMD is not required for 2018.  If she terminates during 2018 after the distribution has been made, 2018 will become a required distribution year, with no assets left to make the RMD.  If that happens, the distributing plan is still treated as having satisfied its minimum distribution requirements, but the the recipient plan will have received an invalid rollover amount.

Are we agreed that in the case originally posed, there is no RMD?  She did NOT terminate.  I'm confused by subsequent responses which see to overlook this detail and are off to the races - in the wrong direction, IMO.

[Luke Bailey]

Bird, I am agreed no RMD.

[RatherBeGolfing]

2 hours ago, Bird said:

Are we agreed that in the case originally posed, there is no RMD?  She did NOT terminate.  I'm confused by subsequent responses which see to overlook this detail and are off to the races - in the wrong direction, IMO.

Agreed.  Using the facts from the OP, 2018 is not a required distribution year. 

[CJ Allen]

Agreed.  No RMD and no RBD if plan uses current rules to apply 401(a)(9).  This would, generally, be an eligible rollover distribution unless something other than RMD would cause it to not be an eligible rollover contribution (eg., corrective distribution requirement).  The IRA will pick up the 12/31/2018 balance for RMD required in 2019 based on IRA regulations.

Leaving the balance in the plan, while actively employed, will defer the RMD RBD until year of actual retirement (if plan document does not employ pre-2002 regulations in the plan document/adoption agreement).