In-Service 401(k) Rollover after 70.5 and RMD
We are working with a client who is in his 80’s. He is currently working for his employer and has 3 401(k) plans with this employer (TIAA-CREF, American Century and Vanguard) but is only contributing to the TIAA-CREF plan. We are helping them consolidate accounts for several reasons. The client is rolling over his American Century 401k and Vanguard 401k to his IRA.
American Century rolled over the entire account and sent the client his RMD. This is correct based on my understanding that the RMD must come first from the employer plan when doing a rollover and you are over 70.5. The question pertains to Vanguard.
Vanguard wouldn’t allow a 100% rollover so he is rolling over a specified dollar amount (most of the 401k). They informed us since he is “in-service” and is not rolling over 100% of the account, he isn’t required to take an RMD from the 401k. He will only be required to take the RMD from the 401k once he retires and rolls over the remaining balance.
Of course he will take the RMD from his IRA in 2020 but my question is, why isn’t he required to take a 2019 RMD from the Vanguard 401k when doing the rollover, even if he is still working for the employer. Is this correct?
Thank you!
Permalink Submitted by Alan - IRA critic on Tue, 2019-04-16 18:26
Are you sure that the current employer plan did not just accept rollovers from his former 401k plans? If so, if the current plan is with TIIA, their plan provisions determine which portions of the plan are eligible for rollover while still working. However, from your description it sounds like client is dealing with Am Cent and VG directly as if they were NOT part of his current employer plan. Could you clarify this?
Permalink Submitted by Steven Stern on Wed, 2019-04-17 13:55
Hi and thanks for your reply! He currently has 401k plans with TIAA, Vanguard and American Century all through the current employer. His 401k with American Century was just rolled over into his IRA and an RMD was sent to him. However, we weren’t allowed to roll over his entire Vanguard 401(k), we rolled over nearly 100% but there is a small balance. Vanguard is saying that since there is no termination date as he is still working, and there is a balance in the Vanguard plan, he is not required to take an RMD. It seems that this could be due to plan rules but I always thought that if you roll out any funds from a 401k after 70.5 (even if still working or “in-service”) that an RMD would be required. This is complex and I think it may be a unique situation based on the Plan Summary Document. Thanks.
Permalink Submitted by Alan - IRA critic on Wed, 2019-04-17 15:25
Perhaps the employer changed the provisions of their plans in the past and changed plan administrators at the same time, leaving the old plans in place. If so, client could only contribute to the current plan with TIIA and the other balances are grandfathered. Just guessing, since this is an odd setup. If this is the case, each plan could conceivably have different provisions for in service distributions, and even for RMDs because a plan can have more restrictive RMD requirements than the IRS requirements. IRS rules allow the “still working exception” to defer RMDs while an employee is still working and is not a >5% owner, but any specific plan could override that. The VG administered plan is consistent with IRS rules in not requiring an RMD while still working, therefore client could roll over the entire balance that the plan allows to be distributed. VG should be able to explain why a small portion was not eligible for distribution, but it may be the unvested amount, or it could be the RMD amount should the client retire before 2020 since that would make 2019 an RMD distribution year for the client. Otherwise, if client was allowed to roll over the entire balance while working but then retired before year end, client would have rolled over the RMD resulting in an excess IRA contribution. However, if client works into 2020, IRS rules allow a full rollover without RMD in 2019. Am Cent proceeded like most plans, allowing a full rollover without holding back any amount and letting the participant deal with the excess IRA contribution if they retire before year end.