RMD Mistake, help!

[Rgoose27]

Folks, any help is appreciated!

80 year old participant, still active and employed rolled over to an IRA in 2019 (in-service withdrawal).  Retirement/termination date is 1/15/20.  The 401k vendor automatically sent out a RMD even though participant is active and will not terminate until next year.  

What can be done with this RMD?  Vendor will not take the money back, can it rolled into an IRA within 60 days?  What about the tax that was withheld?

THANK YOU!

[Bird]

RMDs are not eligible for rollover...but as you note, it isn't, even though it was processed as one.  So I'd say yes it could be rolled over, including the tax if the participant can come up with that money elsewhere.  The participant has 60 days but I'd try to get it done by 12/31 so the receiving IRA can issue a 5498 telling the IRS it was received, otherwise it will almost certainly result in correspondence since they won't match the distribution and the rollover.  (There's nothing wrong with doing it in 2020, within 60 days, but I'm just suggesting this to avoid a hassle.)

[Larry Starr]

35 minutes ago, Bird said:

RMDs are not eligible for rollover...but as you note, it isn't, even though it was processed as one.  So I'd say yes it could be rolled over, including the tax if the participant can come up with that money elsewhere.  The participant has 60 days but I'd try to get it done by 12/31 so the receiving IRA can issue a 5498 telling the IRS it was received, otherwise it will almost certainly result in correspondence since they won't match the distribution and the rollover.  (There's nothing wrong with doing it in 2020, within 60 days, but I'm just suggesting this to avoid a hassle.)

Why do I think that IF you take a distribution and you are past 70 1/2 but are relying on the "currently working" exemption for non owners, that YOU DO have an RMD the moment you take money out of the plan. I think it was handled correctly.

[Kevin C]

The first required distribution calendar year for a non-5% owner is the year of retirement. 

Quote

1.401(a)(9)-5 Q&A 1(b) Distribution calendar year. A calendar year for which a minimum distribution is required is a distribution calendar year. If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee attains age 701⁄2 , the employee's first distribution calendar year is the year the employee attains age 701⁄2 . If an employee's required beginning date is April 1 of the calendar year following the calendar year in which the employee retires, the employee's first distribution calendar year is the calendar year in which the employee retires. In the case of distributions to be made in accordance with the life expectancy rule in §1.401(a)(9)-3 and in section 401(a)(9)(B)(iii) and (iv), the first distribution calendar year is the calendar year containing the date described in A-3(a) or A-3(b) of §1.401(a)(9)-3, whichever is applicable.

 

[NJ Mike]

Larry -

Look at Private Letter Ruling 200123070 which seems to say there is no RMD.

Here is a summary.  I can provide fill ruling if needed. Taxpayer attained age 70 1/2 in 1997.

During Month 3, 1999, Taxpayer A received an in-service distribution in the amount of Amount 1 from Plan X which distribution was directly transferred to IRA Y, a pre-existing individual retirement arrangement. The amounts transferred (rolled over) from Plan X to IRA Y were accounted for separately from amounts in IRA Y prior to said transfer.

In Month 6, 2000, Taxpayer A married Taxpayer B, whose date of birth was during Year 9. On or about Date 4, 2000, Taxpayer A named Taxpayer B as the beneficiary of his IRA Y.

On or about Date 5, 2000, assets of IRA Y, in the amount of Amount 2, were transferred, by means of a trustee to trustee transfer, to IRA Z. The amounts that were transferred from IRA Y to IRA Z consisted solely of the amounts originally transferred from Plan X, with adjustment for gains and losses. Assets that were present in IRA Y prior to the Month 3, 1999 transfer (rollover), referenced above, were not transferred to IRA Z.

Taxpayer A elected to receive required dis­tributions from his IRA Z over his and Taxpayer B’s joint life expectancy. By means of a form dated Date 8, 2000, Taxpayer A elected not to recalculate either his or Taxpayer B’s life expectancy.

Based on the above facts and representa­tions, you, through your authorized representa­tive, request the following letter rulings:

1. That as of Month 3, 1999, Taxpayer A had not attained his Code section 401(a)(9) required beginning date with respect to his inter­est in Plan X;

 2. that Taxpayer A’s required Code section 401(a)(9) required beginning date with respect to his interest in Plan X is April 1 of the calendar year following the later of (1) the calendar year in which he attains age 70 1/2 or (2) the calendar year in which he separates from the service of Company C;

3. that Amount 1, which was directly transferred (rolled over) from Taxpayer A’s Plan X account to his IRA Y during Month 3, 1999, was not subject to the Code section 401(a)(9) required distribution rules, made applicable to IRAs under Code section 408(a)(6), during calendar year 1999;

 

Based on the above, the Service concludes -with respect to your first three ruling requests as follows:

1. That as of Month 3, 1999, ‘Taxpayer A had not attained his Code section, 401(a)(9) required beginning date with respect to his inter­est in Plan X;

2. that Taxpayer A’s required Code section 40l(a)(9) required beginning date with respect to his interest in Plan X is April 1 of the calendar year following the later of (1) the calendar year in which he attains age 70 1/2 or (2) the calendar year in which he retires from Company C; and

3. that Amount 1, which was directly transferred (rolled over) from Taxpayer A’s Plan X account to his IRA Y during Month 3, 1999, was not subject to the Code section 401(a)(9) required distribution rules, made applicable to IRAs under Code section 408(a)(6), during calendar year 1999.

[Larry Starr]

1 hour ago, Kevin C said:

The first required distribution calendar year for a non-5% owner is the year of retirement. 

 

Yup; went back and re-read the rules to clarify. Because she did not RETIRE, she could do the in-service withdrawal and rolllover to an IRA and not have to take an RMD.  If she had RETIRED, she would have had to take the RMD even though her required beginning date is April 1 of the following year.  And there is significant lack of clarity as to what "retired" means, which in some cases (but not this one I would suggest) make it less than clear as to how to apply the rules.  Thanks.

[Rgoose27]

Thanks for the replies thus far.

Does anybody disagree that the RMD shouldn’t have to be taken, and kicking out the RMD would be a system limitation, NOT an IRS requirement? 

[Mike Preston]

Not me. 

[Peter Gulia]

Leaving aside questions about whether the plan required a distribution:

 

If the payer paid an amount without the plan administrator’s particular instruction and not under the terms of the administrator’s standing instruction, might such an act have been the payer’s breach of the payer’s service agreement?

[Bird]

On 12/6/2019 at 3:46 PM, Peter Gulia said:

If the payer paid an amount without the plan administrator’s particular instruction and not under the terms of the administrator’s standing instruction, might such an act have been the payer’s breach of the payer’s service agreement?

I think the issue was that the participant requested a rollover and the vendor incorrectly processed part as an RMD.  It's a mistake but it's the wrong kind of payment, not an unrequested payment.

[Bird]

On 12/6/2019 at 3:09 PM, Rgoose27 said:

Does anybody disagree that the RMD shouldn’t have to be taken, and kicking out the RMD would be a system limitation, NOT an IRS requirement? 

I do not disagree.