RMD in Year of Termination

[rblum50]

I have a client that has had a 401(k) Plan and has been taking RMD for several years. He terminated the plan in early 2019 and rolled his account into an IRA.  Question: In the year of termination, was he required to take an RMD from both the terminating plan and his IRA?  In other words, must he take two RMD's in 2019?

[spiritrider]

Did he take an RMD from the 401k plan before the rollover? If not the amount of the RMD was an excess contribution and must be returned with earnings, because RMDs are not rollover eligible. In fact, the 401k plan should have distributed the RMD itself before allowing a rollover over of the balance.

Retirement account RMDs are always based on the year-end balance at the end of the previous year. So the amount of the eligible rollover to the IRA is not subject to an IRA RMD in the year of the rollover. It will be included in that year's year-end balance for the next year's IRA RMD.

[Larry Starr]

3 hours ago, spiritrider said:

Did he take an RMD from the 401k plan before the rollover? If not the amount of the RMD was an excess contribution and must be returned with earnings, because RMDs are not rollover eligible. In fact, the 401k plan should have distributed the RMD itself before allowing a rollover over of the balance.

Retirement account RMDs are always based on the year-end balance at the end of the previous year. So the amount of the eligible rollover to the IRA is not subject to an IRA RMD in the year of the rollover. It will be included in that year's year-end balance for the next year's IRA RMD.

Perfect answer!

[Belgarath]

I would merely observe that although it was handled incorrectly by the Plan, (assuming this was a direct rollover), the PLAN has nevertheless satisfied its requirement to distribute the RMD for the year. (At least, that's how I understand it...) It is just that the RMD amount was incorrectly sent as a direct rollover. And almost certainly reported incorrectly as well. A screw-up no matter how you look at it.

[rblum50]

As it turns out, his entire amount was rolled to new IRA established by him in 2019. From this account, the correct RMD, which should have eminated from the plan was distributed by the IRA during 2019. Therefore, even though the RMD came from the IRA instead of the Plan, the correct amount was distributed to him in a timely manner. I would think that this would be forgivable by the IRS in the unlikely occurance of an audit.

[Bird]

19 hours ago, rblum50 said:

I would think that this would be forgivable by the IRS in the unlikely occurance of an audit.

Maybe/probably.  Now you have a situation where you hope the plan didn't report things correctly (part RMD, taxable and not eligible for rollover).  

[Appleby]

On 2/10/2020 at 6:25 AM, Belgarath said:

I would merely observe that although it was handled incorrectly by the Plan, (assuming this was a direct rollover), the PLAN has nevertheless satisfied its requirement to distribute the RMD for the year. (At least, that's how I understand it...) It is just that the RMD amount was incorrectly sent as a direct rollover. And almost certainly reported incorrectly as well. A screw-up no matter how you look at it.

Hi Belgarath- your understanding is correct. Ideally, the plan should issue corrected 1099-Rs, showing the RMD amount as paid to the participant, and the balance as a direct rollover.