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Rolling over IRA to Plan to avoid RMDs


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Have a real saver of an employee who has no ownership in the company sponsoring the 401(k) plan that she is a participant in.

This is a valued employee so she is an HCE. She has a substantial amount in an IRA and was thinking of rolling her IRA into the 401(k) plan to avoid having to take RMDs. She is currently 69 and is looking ahead. Anything wrong with rolling over the IRA now with the idea that she will not need to take RMDs until she actually retires, which she claims will be at least 10 years?

Thanks.

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How is a "valued employee" an HCE, you mentioned "employee who has no ownership".  Unless she has ownership or is earning more than $150,000 (in 2023 increasing to $155,000 in 2024) she is not an HCE.  Providing the Plan Document allows for such transfers and also allows employees to defer their RMD until separation of service, the only issue is of a potential increased RMD amount and increased beneficiary distributions (and tax) due to returns and compounding over the ten years.

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Providing the plan allows it, a rollover of her TIRA into the 401(k) and she's not a 5% owner, will indeed defer RMDs. But is this in her best interest? Assuming her future retirement year will be at age 79, the calculations would be to do a present value of projected tax cash flows from alternatives such as

- Doing Roth conversions up to the top of her current marginal tax rate until RMDs will be due for her  at age 73, and then the tax on her RMDs at the margin

- Leaving the TIRA until RMDs begin at age 73 without Roth conversions

- Transferring her TIRA into her the 401(k) and deferring RMDs until age 79

The tail-end of each analysis would include the cash flows from beneficiaries who inherit her TIRA over their 10 year withdrawal period

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Another financial-planning choice is an age 70½ (not 75 or 73) IRA holder’s opportunity to direct the IRA’s custodian to pay a qualified charitable distribution directly to a charitable organization and exclude up to $105,000 [2024] from a year’s gross income. I.R.C. (26 U.S.C.) § 408(d)(8).

Because that tax rule is particular to IRAs (not employment-based retirement plans), a 69-year-old might leave in an IRA some balance for anticipated charitable donations. (Or an employment-based plan’s participant who has not reached her required beginning date might yearly rollover amounts into an IRA for the next year’s-worth of anticipated charitable donations.)

For some people (especially those whose tax returns use a standard deduction rather than itemized deductions), qualified charitable distributions can be a tax-efficient way to make one’s charitable donations.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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