By Jeremy T. Rodriguez, JD
We have a client that retired on 1/2/2019 and he was over 70.5. He was not required to take his RMD in 2018 from his 401k since he was still working (he did take his 2018 RMD from his IRA). He rolled that 401k into his IRA this year (which was allowed in his plan since he retired in 2019), so we are trying to determine what his IRA RMD amount should be for this year. Should we calculate based on the 12/31/18 value of his 401k, or the amount that was rolled over into his IRA this year? We are thinking it would be the 12/31/18 value, but wanted to verify.
Thank you for the help,
RMDs from qualified plans, like the 401(k), and IRAs cannot be aggregated. That means you would calculate the RMD from the IRA using the 12/31/18 account balance, which would not include the 401(k) rollover. The 401(k) RMD would be determined using the plan account balance as of the same date. However, you’ve got an additional problem; the 401(k) RMD should not have been rolled over into the IRA. Instead, it should have been distributed before the rollover. That means you have an excess contribution. Thus, in addition to distributing the 401(k) RMD that was rolled over, you will also have to calculate the earnings on that amount and distribute those funds prior to October 15, 2020 to avoid the 6% penalty.
Do you have any suggestions on how to reduce the tax burden on traditional IRA withdrawals? I’m 66 and reaching the age when RMD’s kick in and I’m wondering if there is any advantage to taking withdrawals earlier to lower RMDs and avoid higher tax brackets.
Can you answer my question or point me in the right direction? Any insight you can offer would be greatly appreciated.
Taking withdrawals early is certainly an option. You are in what we call the “sweet spot.” During this time, you aren’t subject to Required Minimum Distributions, so you are not forced to take a distribution. However, you also aren’t subject to the early distribution penalty if you do decide to take a distribution. Therefore, this is the optimal time to begin planning for retirement. Another option would be to convert all, or a portion, of your IRA to a Roth IRA. Remember, Roth IRA owners do not have to take RMDs during their lifetime. Strategic partial conversions over the next few years, if done properly with the help of your tax and financial advisors, can accomplish many things. You can potentially stay in a lower tax bracket, begin the process of paying taxes on your traditional IRA, reduce future RMDs, and ultimately pass tax-free dollars to your beneficiaries!