TSP In-Service with RMD
Client turned 70 in 11/2016. In January of 2017 an in-service withdrawal was made and transferred to TIRA and Roth IRA. Now, she intends to retire this year. This will cause that in-service withdrawal to include RMD which would be ineligible for rollover. Let’s assume she had 75% in Traditional and 25% in Roth within the TSP of $1,000,000. The TSP makes pro-rata distributions, and requires pro-rata RMDs. How to remove the excess contribution is the question. Can it be taken out of just the TIRA? -m
Permalink Submitted by Alan - IRA critic on Mon, 2017-05-22 18:26
No known IRS guidance on this question, but if the TSP issues a 1099R showing taxable distributions (amount of the RMD) separate from the direct rollover 1099R forms, it would be logical to treat the excess contributions in accord with those 1099R forms, and the Roth TSP taxable 1099R could only have gone into the Roth IRA. If no taxable distribution 1099R forms are issued by the TSP, then the client could report the RMD as a pre tax TSP distribution and the excess contribution made 100% to the TIRA. However, that would increase client’s taxable distribution on line 16b. In other words, the excess contribution distribution should match up to how the taxable RMD is reported on 16b.
Permalink Submitted by [email protected] on Mon, 2017-05-22 18:51
1099Rs won’t be issued until 1st Quarter 2018. Is there an expectation that client would be able to get an explanation from TSP as to how they will report prior to then in order to rectify the situation sooner rather than next year? Plan this year is to begin conversions. – m
Permalink Submitted by Alan - IRA critic on Mon, 2017-05-22 19:52
Client could call the TSP and perhaps determine how the 1099R forms will be issued. The 1099R Inst under “Corrected Form 1099R” use this exact example and indicates that the portion of the direct rollover that turns out to be RMD money must be reported on a separate 1099R as a distribution rather than G coded or H coded direct rollovers. That said, the TSP may not adhere to this requirement. I assume that if client is going to convert from TIRA to Roth IRA this year, then client would have more taxable income space to convert if the TSP reported a Roth TSP RMD distribution that would be mostly non taxable. But the excess IRA contribution corrective distribution will not be taxable except for earnings and cannot count toward the 2017 TIRA RMD.
Permalink Submitted by [email protected] on Mon, 2017-05-22 20:27
Assuming they will send correct 1099Rs, where does the excess contributions have to be taken from? Can they come just from the TIRA or will they have to be taken from both TIRA and RothIRA? In the example, the RMD would be $37,735. Would he have to take 75% of that from the TIRA and 25% from the Roth, or could it all come out of the TIRA? -m
Permalink Submitted by Alan - IRA critic on Tue, 2017-05-23 02:59
After reconsidering this unique situation, it should not make a difference how the TSP reports the RMD distributions. An excess contribution of 37,735 has been made collectively to two different IRA types and are treated as regular IRA or Roth IRA contributions. As in cases where a taxpayer makes contributions to both TIRA and Roth IRAs, they have their choice prior to the extended due date which IRA they wish to treat as receiving the excess contribution. Therefore, the client should be able to request the entire corrective distribution from the TIRA if they wish. Client is too old to make a regular TIRA contribution, but client may be eligible for a regular Roth IRA contribution. Therefore, if client is eligible they could leave 6500 in the Roth IRA as an allowable regular contribution and request a corrective distribution from the TIRA in the amount of 31,235.
Permalink Submitted by [email protected] on Wed, 2017-05-24 00:29
This sounds like an easy way to rectify the issue of excess contribution. Thanks, – m