Advanced Underwriting Consultants

Ask the Experts – January 10

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: My client thinks he can avoid taking required minimum distributions (RMDs) by distributing all of the funds late in 2013, and then completing a 60-day rollover early in 2014. I know he’s wrong, but I can’t put my finger on why.

Answer: You are correct that your client cannot avoid RMDs this way.

In determining the amount of RMDs taken for a given year, the general rule is that the measuring date for a retirement plan’s account balance is December 31 of the previous year. For example, in determining the amount a taxpayer must withdraw from his retirement plan in 2014, he would identify the plan’s account balance as of December 31, 2013.

If no other exception applied to your situation, then your client’s plan would actually work to avoid taking RMDs because on December 31, 2013, the client’s account balance would be $0—so no RMD would be due in 2014.

However, the IRS has ruled differently in Regulation Section 1.401(a)(9)-7, A-2:

If the amount rolled over is received in a different calendar year from the calendar year in which it is distributed, the amount rolled over is deemed to have been received by the receiving plan in the calendar year in which it was distributed.

This rule applies to your client’s situation because the amount rolled over was received in 2014, but distributed in 2013. Therefore, your client would be deemed to have received the rollover proceeds in 2013. Since the new plan is deemed to contain the rollover proceeds in 2013, the account balance as of December 31, 2013, would equal the amount of the rollover.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.