RMD on 401-k

[KevinMc]

A 5% owner of a law firm is approaching age 70 and would like to be bought out of his ownership share to avoid having to take RMD's from his account balance?  Would this work?  For example, is there a "lookback" period the IRS has on a situation like this?

Also, is there a separate IRS table for calculating RMD's from a 401-k as opposed to an IRA?  Any help appreciated!

[justanotheradmin]

The 5-Percent owner status is as of when they turn 70 1/2 . Specifically "(I) except as provided in section 409(d), in the case of an employee who is a 5-percent owner (as defined in section 416) with respect to the plan year ending in the calendar year in which the employee attains age 70 1/2, or"

that's from 401(a)(9)(C)(ii)(I). 

So if they sell before then, it's fine. If they sell after then, they are still forever for RMD purposes a 5% owner. 

the table is the same, with Uniform table for most, and Joint Life if spousal beneficiary is more than 10 years young ( see pub 590-B). 

[C. B. Zeller]

To clarify slightly, the RBD is determined based on  the plan year ending in the calendar year in which the employee attains age 70 1/2. It is not based on whether or not the person actually owns 5% on the date they turn 70-1/2.

If the 5% owner in question is turning 70 on or before June 30 of this year (assuming plan year is calendar year), then they will turn 70-1/2 during 2019. They were a 5% owner with respect to the 2019 plan year, so 2019 is a distribution calendar year for them and their RBD will be 4/1/2020.

If their 70th birthday is between July 1, 2019 and December 31, 2019, then they would have until December 31, 2019 to dispose of their ownership interest to avoid being subject to RMDs.

[FPGuy]

Just wanted to add that the section 318 constructive ownership rules apply (see IRC 416(i)(1)(B)(i), i.e., your client may be a deemed 5% owner by virtue of stock owned, directly or indirectly, by or for his spouse, and his children, grandchildren and parents. Can be problematic for a business that wants to maintain family ownership.

 

[imchipbrown]

And isn't it true that he could buy back his shares sometime afterward, say age 71 or later?  Tom Poje had some interesting posts/comments about people who became 5% owners later in life (and after 70.5).