Jenny has a 401(k) plan at work and she has an IRA. Jenny is 72 but is still working. Her employer plan has a “still working” exception so Jenny does not have to take required minimum distributions (RMDs) from her plan. However, she does have to take RMDs from her IRA.
Jenny meets with her advisor and they decide that Jenny should move some of her 401(k) assets to an IRA. Jenny does an in-service withdrawal from her plan and moves $50,000 to her IRA in November bringing her IRA balance up to $200,000.
Now for the hard part. What is Jenny’s RMD from her IRA? Is the $50,000 included in her IRA RMD calculation?
This is a question that we get a lot but the answer is not all that hard. You have to look at the rules for calculating the IRA RMD. The rules say that you use the prior year-end account balance in the IRA for this year’s RMD calculation. Where was Jenny’s $50,000 on the prior year end? It was in her plan, not in her IRA. So, to calculate her IRA RMD you are not going to include the $50,000. But wait, does that mean that Jenny has no RMD on the $50,000? For the year of the transfer, the answer is yes, there is no RMD. The funds were in the plan on the previous 12/31 and the plan has no RMD so there is no RMD on the $50,000 – for this year. On 12/31 of this year, the $50,000 will be in Jenny’s IRA and will therefore be included in her RMD calculation for next year.
There are only three instances when you have to adjust an IRA balance before calculating an RMD.
Outstanding Rollovers or Transfers
If IRA assets are being moved at the end of the year and have left one IRA account but not yet made it to the new IRA account, you have to add the value of those assets back into your year-end IRA balance before doing your RMD calculation.
Example: Jim is moving his IRA from his current bank to a new bank nearer to his home. He didn’t start this process until December 28th. His transfer is slowed down by the fact that bank employees are on vacation, the banks hold certain transactions at month end, and they are closed for the New Year’s holiday. As a result, the funds have left his IRA at the current bank but have not yet shown up at his new bank. His year-end account balance shows up as zero at both banks. Jim has to add the IRA balance back to his IRA at the current bank in order to calculate his RMD.
Roth Recharacterizations Done the Year After the Conversion
When you do a Roth IRA conversion your IRA balance is reduced by the amount converted to the Roth IRA. If that conversion is later recharacterized, the funds are returned to an IRA account. When those transactions occur in different tax years, the recharacterized amount must be added back into the year-end IRA balance.
Example: Jerry did a Roth IRA conversion of his entire IRA last year. When it came time to pay his taxes this year he did not like the tax bracket he was in, so he recharacterized his Roth conversion. The funds in the Roth IRA are returned to an IRA account and are treated as though they never left his IRA for tax purposes. Jerry must add the recharacterized amount back to his year-end IRA balance in order to correctly calculate the amount of his RMD.
Return of an Excess QLAC Contribution
An excess amount used to purchase a qualifying longevity annuity contract (QLAC) will disqualify the QLAC unless it is timely returned to the IRA. A QLAC balance is not included in IRA RMD calculations until the IRA owner attains age 85. When the excess amount is returned the year after the QLAC purchase, it must be added back into the IRA’s year-end balance to correctly calculate the RMD from that IRA.
Jeanne had the maximum amount of $125,000 in her IRA used to purchase a QLAC. However, Jeanne was only eligible to use $100,000. The remaining $25,000 was an excess QLAC contribution. Jeanne must remove it from the QLAC as a return of an excess contribution. She will have the funds go back into her IRA as regular IRA funds. Jeanne will have to add the amount returned to the IRA back into her prior year-end IRA account balance to accurately determine her RMD from that IRA.
As you can see, there is no rule that says funds moved from an account with a delayed RMD into an account that must take an RMD must be included in the new account balance before calculating the RMD. It seems like you are getting a free ride for the year but really, you are not. The plan funds would have no RMD if they were left in the plan, moving them to an IRA during the year does not change that status.