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RMDs MUST Be Taken Before Doing a Rollover

By Beverly DeVeny, IRA Technical Expert

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A required minimum distribution (RMD) is not eligible for rollover.

In an IRA, what this means is that when you have a required distribution for the year and you take a distribution payable to yourself, only the amount over and above the RMD amount can be put back into another IRA. This is true even if you take the distribution in January and you were planning on taking your RMD in December.

Example: Tom has six IRAs invested in IRA CDs. He always takes his RMD from CD #4 in November each year. This year his RMD is $1,000. CD #2 comes due in February this year. He wants to move it from Bank A to Bank B. Bank A issues Tom a check payable to Tom for $30,000. He walks across the street and puts all $30,000 into a new IRA CD with Bank B. Tom has a problem. Only $29,000 of that check from Bank A is eligible for rollover to the new IRA CD at Bank B. Tom cannot rollover his RMD of $1,000. Tom is no longer eligible to contribute to an IRA because he’s age 70 ½ or older, so he now has an excess contribution of $1,000 in the IRA account at Bank B.

An IRA account owner can avoid this problem if they do a trustee-to-trustee transfer of the IRA funds. An RMD can be transferred from one account to another. A transfer is where the IRA owner does not have the ability to use the funds while they are moving from one account to another.

In an employer plan, all distributions from the plan are treated as rollovers by the tax code. You can have either a direct rollover – the funds go directly from the plan to the IRA account with the plan participant not able to use the funds while they are in transit – or you have an indirect rollover – the funds go to the plan participant and there is 20% mandatory withholding on taxable amounts that are eligible for rollover. Since the RMD cannot be rolled over, the plan should first issue one check to the plan participant for the RMD before issuing any checks for a direct rollover. When the check for all the plan funds is issued to the plan participant, he can only roll over any amounts in excess of the RMD as in the example above.

When the RMD amount is rolled over to an IRA, you have an excess contribution in the IRA account. It can be corrected with no tax consequences if it is removed by October 15th of the year after the excess contribution. However, it cannot be corrected by simply removing the excess amount. You must tell the IRA custodian that you are removing an excess contribution and you must do a net income calculation on the amount of the excess contribution. In the example above, Tom has an excess contribution of $1,000. He must remove the $1,000 plus any earnings or losses attributable to that $1,000.

If the excess contribution is not removed, there is an excise tax of 6% per year for each year that it remains in the account. The tax is reported on Form 5329 which should be filed with the tax return for each year the penalty is due. When the form is not filed, the statute of limitations does not start to run on the excess contribution. This can leave the taxpayer open to substantial penalties in addition to the 6% penalty. IRS can assess interest on the unpaid penalties, failure to file penalties, and, in some cases, accuracy related penalties.

 Article Highlights:

  • A required minimum distribution is NOT eligible for rollover
  • Required distributions MUST be taken before completing a rollover of other rollover-eligible funds
  • Required distributions that are rolled over become excess contributions in the IRA


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