Non Required Minimum Distribution

Owner age 83, has been taking RMD's since Age 70 1/2.  He wants to take a distribution in 2020 in the same amount as would be required if he took an RMD.  

Question , can he take as an RMD OR must he take as a regular distribution and have the 20% mandatory withholding taken out?

Thanking you in advance for any help.

Be safe everyone.

Richie

There are no RMDs for 2020.

24 minutes ago, DPSRich said:

Owner age 83, has been taking RMD's since Age 70 1/2.  He wants to take a distribution in 2020 in the same amount as would be required if he took an RMD.  

Question , can he take as an RMD OR must he take as a regular distribution and have the 20% mandatory withholding taken out?

Thanking you in advance for any help.

Be safe everyone.

Richie

 

It's not an RMD (as noted, there is no such thing in 2020), have the plan call it a CRD (Corona Related Distribution):

The distribution will be exempt from the 20% mandatory tax withholding that generally applies. Your recordkeeper may withhold 10% from the distribution for income tax purposes, unless you elect otherwise.

If the employer is not comfortable with that, have them make a direct trustee to trustee distribution to the 83 year old's IRA (or go set one up at the bank; there is now no max age) and then take it out of the IRA with no withholding. 

And, as I remind clients all the time, withholding is NOT a tax (it's not "withholding tax"); it's an advance payment on your possible tax liability and if you are overpaid, you get it back, and if you are underpaid, you owe the balance and possibly a penalty for being underwithheld.  Ultimately, you are going to have to pay the tax, so elimination of withholding is not necessarily a good thing for many taxpayers.

Thank you very much 

We are assuming this is a DC plan, right?

On 5/13/2020 at 1:55 PM, Lou S. said:

There are no RMDs for 2020.

Help me understand something here.  I admit I haven't gotten too far into this as most ESOPs are pretty far still from making payments in 2020.  But it is my understanding the plan has to make an amendment to elect to not have to pay RMDs.  If there are no RMDs why do they have to do an amendment? 

Logic (in know pension law and logic don't have to go together) would say if they don't elect to waive RMDs via amendment they have to pay RMDs still.  So what are those payments if not RMDs? 

ESOP Guy I think it has to do with how the RMD language is written into your document.

If something that mirrors what a RMD would have been in 2020 in a DC plan is forced to be paid it by the terms of the plan document because of how it is written you have a required payment by terms of the plan but you don't have a RMD, it is eligible for rollover, and is subject to 20% withholding.

Internal Revenue Code of 1986 (26 U.S.C.) § 402(c)(4) includes this:

“If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2020, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or [§] 3405(c) or subsection (f) of this section.”  https://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true

Section 3405(c) calls for 20% withholding on an eligible rollover distribution.  Section 402(c)(4) negates it for what would have been a minimum distribution.

Also, such a would-have distribution—if it is not for a hardship, a period of ten years or more, or a life or life expectancy—is an eligible rollover distribution for purposes other than the three the quoted flush language of § 402(c)(4) lists.

On ‎5‎/‎13‎/‎2020 at 2:26 PM, Larry Starr said:

have the plan call it a CRD (Corona Related Distribution):

But only if the guy or his spouse had COVID (pretty dicey at his age), or suffered income decline due to layoff or reduction in hours (again, seems like a long shot), right?

18 hours ago, Peter Gulia said:

Internal Revenue Code of 1986 (26 U.S.C.) § 402(c)(4) includes this:

 

“If all or any portion of a distribution during 2020 is treated as an eligible rollover distribution but would not be so treated if the minimum distribution requirements under section 401(a)(9) had applied during 2020, such distribution shall not be treated as an eligible rollover distribution for purposes of section 401(a)(31) or [§] 3405(c) or subsection (f) of this section.”  https://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true

 

Section 3405(c) calls for 20% withholding on an eligible rollover distribution.  Section 402(c)(4) negates it for what would have been a minimum distribution.

 

Also, such a would-have distribution—if it is not for a hardship, a period of ten years or more, or a life or life expectancy—is an eligible rollover distribution for purposes other than the three the quoted flush language of § 402(c)(4) lists.

So Peter, in plain English: (1) Because a nonperiodic distribution (assuming that it is not part of an elected periodic amount that was designed to satisfy 401(a)(9)), not subject to 20% withholding, but subject to 10% withholding, although can elect zero withholding; (2) amount can be rolled over; (3) no 402(f) notice required (although some sort of explanation for participant would be nice); (4) plan cannot be disqualified if does not offer direct rollover for distribution. Agree?

1 hour ago, Luke Bailey said:

But only if the guy or his spouse had COVID (pretty dicey at his age), or suffered income decline due to layoff or reduction in hours (again, seems like a long shot), right?

Wrong.  The employee self-certifies that it's a CRD; there's lots of circumstances that will apply and no one is going to have to prove it. And as I said in my post, if the employer is not comfortable with that, do a trustee to trustee transfer to his IRA and then he can just take it out of there.

Luke, yes.  For a distribution that would have been the year’s minimum distribution, the administrator need not:

furnish a § 402(f) notice,

provide a default direct rollover for a distributee who did not render her instruction,

allow the distributee to instruct a direct rollover.

The payer withholds for Federal income tax as if the distribution were not an eligible rollover distribution—usually, 10% or according to a proper withholding certificate.

This kind of distribution can have different treatments for tax-withholding and for the distributee’s tax return.

1 hour ago, Larry Starr said:

Wrong.  The employee self-certifies that it's a CRD; there's lots of circumstances that will apply and no one is going to have to prove it. And as I said in my post, if the employer is not comfortable with that, do a trustee to trustee transfer to his IRA and then he can just take it out of there.

Larry, I did not say anything about certification or review of same. I was just pointing out that it is not a CRD unless the guy qualifies, even if, maybe, in a lot of circumstances, it will be the honor system.

1 hour ago, Luke Bailey said:

Larry, I did not say anything about certification or review of same. I was just pointing out that it is not a CRD unless the guy qualifies, even if, maybe, in a lot of circumstances, it will be the honor system.

But Luke, this is what you said: "But only if the guy or his spouse had COVID (pretty dicey at his age), or suffered income decline due to layoff or reduction in hours (again, seems like a long shot), right?"

And that is certainly NOT what is going to go on in the real world and that is certainly NOT the ONLY way and I feel it's misleading to say that without pointing out the reality of the rules, which is that there really aren't any!  I didn't write this stuff; Congress did!

Just now, Larry Starr said:

But Luke, this is what you said: "But only if the guy or his spouse had COVID (pretty dicey at his age), or suffered income decline due to layoff or reduction in hours (again, seems like a long shot), right?"

And that is certainly NOT what is going to go on in the real world and that is certainly NOT the ONLY way and I feel it's misleading to say that without pointing out the reality of the rules, which is that there really aren't any!  I didn't write this stuff; Congress did!

 

OK. Good point about what I said, Larry. But I don't think we can entirely throw away the fig leaf. Could be wrong.