Advanced Underwriting Consultants

Question of the Day – November 22

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 is 75 and still working at an employer sponsoring a 401K plan.  The client intends to take a complete distribution of the 401K plan balance and roll it into a traditional IRA.  The client will continue to work for the rest of this year.  Is an RMD required from the 401K plan balance prior to its rollover to the IRA?

Answer: The IRS hasn’t specifically addressed this situation, but we feel that based on current rules the answer is no.

Here’s the analysis.  For the 401K plan, Revenue Code Section 401(a)(9)(C) applies to when the required beginning date occurs:

(C) Required beginning date. For purposes of this paragraph—

(i) In general. The term “required beginning date” means April 1 of the calendar year following the later of—

(I) the calendar year in which the employee attains age 70 1/2 , or

(II) the calendar year in which the employee retires.

Since the employee is still working, based on Section 401, there’s no RMD required from the 401K plan.

Must the taxpayer take the RMD for the 401K account from the IRA after rollover, but before the end of the calendar year?  RMDs are clearly due from the IRA because the client’s older than 70 1/2.  However the rules for calculating the RMD from an IRA is to use December’s balance from the previous year—prior to the rollover.  So our analysis is that there is no RMD required in the year of the rollover attributable to the 401K plan balance.

If the taxpayer did not continue to work for the 401K plan sponsor through the end of the year in which the rollover occurred, the result would probably be different.  In that case, an RMD would have been due from the 401K account based on the prior December’s account balance, and that amount would not have been eligible for rollover to an IRA.

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.