Are You Over 70.5 Years Old and Still Working? Understand Your Options With RMDs: This Week’s Q&A
Director of Retirement Education
This week's Slott Report Mailbag examines RMDs when you are still working past 70.5 years old and inheriting multiple IRAs. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
I have read some of your other articles, but I haven’t seen an answer to this question.
I am 73 years old, still working, and contributing to 401(k) at work. The balance was $180k on 12/31/16. I rolled over half ($91k total) to an IRA in May 2017. I haven't taken the RMD out of the IRA yet, but I plan to before 12/31/17.
Here is my question:
1) Is there a penalty for taking the RMD this way? I'm still doing it before 12/31/17.
2) Do I calculate the RMD on the 12/31/16 balance, even though only half of the balance requires the RMD?
Let’s answer the easy part first. The RMD from your IRA is calculated on your 12/31/16 IRA account balance.
Now let’s consider your 401(k). Since you are still working, I will assume that the RMDs from the 401(k) are deferred until you stop working for that employer. In that case, there is no RMD from the plan for this year so your transfer of plan funds to your IRA has no effect on your RMDs for 2017.
If, on the hand, you do have an RMD from the plan for this year, then the RMD should have been paid out to you before any funds were transferred to the IRA. The RMD is not eligible to be rolled over to an IRA. What you now have is an excess contribution in the IRA in the amount of the RMD. It must be removed from the IRA as a return of an excess contribution. The distribution will include any gains or losses on the RMD amount for the time it was in the IRA. Be sure to tell the IRA custodian that you are doing a return of an excess contribution. Just removing the RMD amount from the IRA does not fix this situation.
We have a situation where a marital trust was the beneficiary of a traditional 401(k) plan that has a Roth portion. As a result, we have had to set up both a Marital Trust Inherited Traditional IRA and a Marital Trust Inherited Roth IRA.
We also have Traditional and Roth IRAs where the marital trust is the beneficiary. Is it possible to have the qualified plan (401(k)) funds commingled with the IRA funds in the respective Inherited Traditional and Roth IRAs?
Hope this makes sense.
Inherited IRAs that are inherited from the same decedent and that will be using the same life expectancy factor can be combined. For example, Todd was the named beneficiary on three IRAs he inherited from his brother. Todd can combine all three inherited IRAs into one inherited IRA. If we change the example a little and say that Todd inherited two IRAs from his mother and one IRA from his brother who inherited from Todd’s mother, Todd can only combine the two IRAs that he inherited directly from his mother. The IRA that came from Todd’s brother will be using his brother’s life expectancy while the other two IRAs will be using Todd’s life expectancy.
So, as long as the traditional IRAs all had the trust as the beneficiary, they can be combined. And the same would be true for the inherited Roth IRAs.
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