Incorrect 401(k) Rollover to IRA

[Kattdogg12]

We have a terminated plan that had a rollover go from the 401(k) to a traditional IRA.  Some of this money was pretax, some was Roth.  The FA (who did this incorrectly) was told she had to roll the entire balance back to the plan, open a Roth IRA and try again. 

The brokerage firm is stating that now that the participant is age 73, she must take her RMD first.  One issue is that they are using all $$ to determine even though some is Roth because frankly, to them it is.  My question is does the participant need to take an RMD from the 401(k) as well before it's rolled back out to the correct IRA(s)?  The original occurred in 2024 so both accounts have 12/31/2024 balances.   

 

Thanks!

[Artie M]

Not sure if the participant should have had to return all the funds to the qualified plan but since they did what happened before seems to be moot.  From your facts, it sounds like the participant was 72 in 2024 and turned 73 in 2025.  Since she is 73 and receiving a distribution from the pre-tax account, she is required to receive a minimum distribution.

To determine the amount of the RMD, the plan should only be looking at the portion of the account that is non-Roth 401(k).  Prior to 2024, RMDs would have been based on the aggregate total of pre-tax and Roth 401(k) amounts.  But, generally beginning in 2024, Roth 401(k) amounts are no longer subject to the RMD rules so the plan should look at those amounts separately.  

When the plan makes a distribution in a year when an RMD is due, the RMD amount (as determined based on the 12/312024 balance in the pre-tax account) is required to come out first (Also, although the distribution date of the first RMD normally can be deferred until April 1 of the following year, since this is a distribution from the terminated plan, the due date of the first RMD cannot be deferred until April 1 of 2026 but will be in the year of distribution).  Treas. Reg. 1.402(c)-2(c)(2)(ii) states that RMDs are not eligible for rollover. Then Treas. Reg. 1.402(c)-2(f)(1) states that if a participant receives a distribution when an RMD is due, the first portion of the distribution is treated as the RMD and is not eligible for rollover.

She will not want to mistakenly roll over all or a portion of the RMD from the plan to an IRA, as the rolled over RMD will be considered an excess IRA contributions subject to an annual 6% penalty unless the participant withdraws the excess amount (the RMD), plus any earnings attributable to it, by October 15 of the following year.

[Kattdogg12]

On 3/10/2025 at 1:40 PM, Artie M said:

Not sure if the participant should have had to return all the funds to the qualified plan but since they did what happened before seems to be moot.  From your facts, it sounds like the participant was 72 in 2024 and turned 73 in 2025.  Since she is 73 and receiving a distribution from the pre-tax account, she is required to receive a minimum distribution.

To determine the amount of the RMD, the plan should only be looking at the portion of the account that is non-Roth 401(k).  Prior to 2024, RMDs would have been based on the aggregate total of pre-tax and Roth 401(k) amounts.  But, generally beginning in 2024, Roth 401(k) amounts are no longer subject to the RMD rules so the plan should look at those amounts separately.  

When the plan makes a distribution in a year when an RMD is due, the RMD amount (as determined based on the 12/312024 balance in the pre-tax account) is required to come out first (Also, although the distribution date of the first RMD normally can be deferred until April 1 of the following year, since this is a distribution from the terminated plan, the due date of the first RMD cannot be deferred until April 1 of 2026 but will be in the year of distribution).  Treas. Reg. 1.402(c)-2(c)(2)(ii) states that RMDs are not eligible for rollover. Then Treas. Reg. 1.402(c)-2(f)(1) states that if a participant receives a distribution when an RMD is due, the first portion of the distribution is treated as the RMD and is not eligible for rollover.

She will not want to mistakenly roll over all or a portion of the RMD from the plan to an IRA, as the rolled over RMD will be considered an excess IRA contributions subject to an annual 6% penalty unless the participant withdraws the excess amount (the RMD), plus any earnings attributable to it, by October 15 of the following year.

Thanks Artie, I guess the IRA custodian is requiring all of it to be returned, but you are right the Roth should have been the only portion that would have to be returned.  And I agree with the Roth not being factored in but because it's all in a traditional IRA, to the custodian it's all pretax (we know how hard it is to work with IRA custodians to correct issues).  

I did misspeak above - the 401(k) did not have a 12/31/2024 balance because all of it was rolled to the IRA during 2024!  

[Bruce1]

I'm not sure why the IRA custodian is wanting to return the money. I'm sure they can do a deposit correction and have the money journaled to the correct account. 

It seems like there would be an issue rolling money back into the plan because she is no longer a participant.