RMDs and Rollovers by Term'd Participant

Hello. I have a participant who is 76.  She is retiring 11/30/17.   She wants to roll her money to an IRA, and then before 4/1/18, take the RMD from her IRA.  Our procedure is to process the RMD first,  and then the distribution.  Can anyone point to IRS information that says she can go ahead and roll over her money without taking the RMD and then take it from her rollover?  Her financial advisor is pushing us to do it this way.

Thanks in advance!

No, but 1.402(c)-2 Q&A 7 is a regulation cite saying that she can not roll her entire balance because part of it will be treated as her 2017 RMD.

Exactly. Although 4/1/2018 is her RBD, 2017 is her first distribution calendar year. This is a qualification requirement/issue for the plan so there are no options on this.

We solved this by giving her an in-service distribution since she's still employed.

Kevin C and CuseFan are correct. The EOB says: 

All amounts distributed during year are ineligible for rollover until minimum

distribution is satisfied. Any distributions in a year in which the participant is required

to receive a minimum distribution (i.e., a distribution calendar year) are treated first

as satisfying the required minimum distribution for that year. See Treas. Reg. §1.402

(c)-2, Q&A-7. This is true for distributions made in the first distribution calendar year,

even though such distributions are not required to be paid until the RBD. Treas. Reg.

§1.408-8, Q&A-4, provides that the same rule applies to distributions made from

IRAs within a distribution calendar year.

1 hour ago, KarolineWriter said:

She is retiring 11/30/17.

Does this mean she is not yet separated from employment? (The title of the post might imply otherwise.)  If she previously separated employment, it's possible that more than one RMD is due/overdue.

50 minutes ago, KarolineWriter said:

We solved this by giving her an in-service distribution since she's still employed.

I don't think that solves the issue if you mean you gave her 100% of her balance today.  If she terminates in 2017 (even after the payment is made) then she still needs a 2017 RMD.  The amount in the IRA that would be the RMD is no longer allowed in the IRA.  Which means she has to get it out of the IRA NOW (not next April) and the plan should still prepare two 1099-Rs.  One showing a taxable distribution and one show a rollover. 

The only way that solves the problem is if she moves her retirement date to at least 1/1/2018. 

It solves the problem in that the moment it was made there was no RMD.  When she retires on 11/30, that means that there was an RMD, retroactive if you will, and so you issue two 1099-Rs, one showing a taxable distribution for the RMD, not eligible for rollover, and one for the balance being rolled over properly.  She does have, I believe, until 4/1 (or 4/15) to take that out as an overcontribution for 2017. 

If she and her broker think that there is no RMD for 2017 if she retires in 2017, then I take a bit of sick pleasure in this...

Sorry to say, but the choice to eliminate the issue by the participant (age 76, per original post) remaining in employment until 1/1/18 may be one that is beyond the control of the participant and the sponsor.

The president of our TPA is in agreement with letting her take an in-service withdrawal.  She is not terminated yet, so had we the broker not mentioned she would be terminating in November, we wouldn't have known and she would be eligible for an in-service withdrawal since she's still employed at this date.

56 minutes ago, KarolineWriter said:

The president of our TPA is in agreement with letting her take an in-service withdrawal. 

Not disrespecting the TPA and/or its president, does the plan document permit this?

1 hour ago, david rigby said:

Not disrespecting the TPA and/or its president, does the plan document permit this?

Hi David. Yes, it does.

Here are the regs on this:

Q-7: When is a distribution from a plan a required minimum distribution under section 401(a)(9)?

A-7: (a)General rule. Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions. For example, if an employee is required under section 401(a)(9) to receive a required minimum distribution for a calendar year of $5,000 and the employee receives a total of $7,200 in that year, the first $5,000 distributed will be treated as the required minimum distribution and will not be an eligible rollover distribution and the remaining $2,200 will be an eligible rollover distribution if it otherwise qualifies. If the total section 401(a)(9) required minimum distribution for a calendar year is not distributed in that calendar year (e.g., when the distribution for the calendar year in which the employee reaches age 70 1/2 is made on the following April 1), the amount that was required but not distributed is added to the amount required to be distributed for the next calendar year in determining the portion of any distribution in the next calendar year that is a required minimum distribution.

https://www.law.cornell.edu/cfr/text/26/1.402(c)-2

Note it is clear and say if an RMD is required for a calendar year the amounts distributed during that year are treated as having the first dollars be the RMDs. 

Note is doesn't say amounts distributed after the person terminates and then an RMD is required.  If at any time in a year an RMD ever becomes required for 2017- which your facts say "yes" to that idea- any distribution during that year has the RMD in it.  It can literally become a retroactive RMD upon the person's termination. 

So while it is true if you give this lady an in-service today there is no RMD in the amount paid.  If she quits any time in 2017 then any payment in 2017 has an RMD in it.  So if that RMD ended up in the IRA it doesn't belong there.

This idea you might give an in-service not knowing if the 70.5 year old person might terminated later is a known quirk but how I described it is clearly how the regs read. 

If she rolls the RMD into an IRA, then that portion of the rollover is reported by the IRA custodian as a regular IRA contribution in box 1 of Form 5498. The plan must issue two Forms 1099-R - one showing the amount eligible for rollover and the other showing the RMD as taxable distribution.

She would have until her tax-filing due date, including extensions, to correct the ineligible contribution to the IRA by removing it under the rules for correcting excess contributions.

This information can be found in the IRS Instructions for Forms 1099-R and 5498. For the contribution part it is in the 5498 section under the heading "Corrected Form 5498". On the distribution side it is in the 1099-R section under the heading "Corrected From 1099-R".

Good discussion. A couple of questions....

If she does the rollover while working, retires (separates from service) that year and does not correct the excess contribution by the RBD, wouldn't she also be subject to the 50% penalty on the nondistributed RMD?

And aren't there several employer plan distributions that could occur prior to the RMD...such as distributions on account of a QDRO, loan payment or advisory fees? I've always assumed the 'RMD First' in relation to elective rollovers or Roth conversions.

12 hours ago, BruceM said:

Good discussion. A couple of questions....

If she does the rollover while working, retires (separates from service) that year and does not correct the excess contribution by the RBD, wouldn't she also be subject to the 50% penalty on the nondistributed RMD?

 

No the person doesn't pay the 50% penalty because the RMD happened.  The 1099-Rs ought to reflect that fact.   One should show the RMD being made and another showing a rollover to teh IRA.  The issue is the RMD is in an IRA.  So they can be issues/penalties because money has been put into an IRA that can't be there. 

I haven't answered your 2nd question because I am not sure I understand it. 

The one part I think I can answer is a payment to Alt Payee because of a QDRO doesn't count towards the RMD and the first dollars of that payment are NOT the RMD. 

I am just not sure what you mean by a payment TO a participant as a loan payment or advisory fee payment.   

I have no specific expertise on this particular subject, but it seems to me that neither loan payments to a participant (if the loan is not permitted to go into default) nor advisory fee payments, even if paid to a plan participant, would count as distributions from the plan at all, and can certainly not be treated as applying towards satisfaction of an RMD.  The loan only becomes taxable if and when it goes into default, and payments of advisory fees ought to be treated as taxable ordinary income (compensation for services rendered) even if the payment was made from the plan.  I expect that advisory fees are charged appropriately against all participant accounts and not just the account of the recipient participant.