Still-Working Exception and Indirect Transfers: Today’s Q&A Mailbag
By Jeremy Rodriguez, JD
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I have a client who turns 71 this year and is still working and contributing to a Roth 401(k) through her company. My client plans to cut back to part-time next year, and as a part-timer, she will no longer be allowed to contribute to the plan.
Does she have to begin taking required minimum distributions once she stops contributing or once she retires?
If the plan has adopted the "still-working exception," then your client can delay taking required minimum distributions (RMDs) until she retires from the employer. That means her first RMD would be due by April 1st of the year following the year she separates from service. There are, however, two important caveats:
- The still-working exception does not apply to someone that owns more than 5% of the company. Instead, 5% owners must begin taking RMDs at age 70½, regardless of working status.
- The exception only applies to the plan of her current employer. Any previous employer plan must issue RMDs by the normal beginning date (i.e., at age 70½).
Check the plan's "Summary Plan Description" or contact the plan administrator to verify if the plan has adopted the still-working exception. Your client may also want to consider rolling over her Roth 401(k) to a Roth IRA. RMDs are not required from Roth IRAs during the Roth IRA owner's lifetime.
I have a problem. I have executed several indirect transfers from my traditional IRA accounts in 2017. I really needed the money in the short term. However, I was able to return the money back into the account in less than 60 days.
How do I minimize the damage? Do you have any suggestions?
Unfortunately, under the Tax Code, you are only allowed one indirect rollover between your traditional IRAs every twelve-months. If you attempt any subsequent indirect rollovers during this twelve-month period, those subsequent rollovers will be considered excess contributions and subject to a 6% per year penalty. Keep in mind that this is not a one-time penalty; it accumulates each year the excess remains in the IRA. Since you caught the mistake before the deadline, you can correct this error without the penalty applying. The bad news is that after you correct your error your funds will be considered distributed from your IRA and taxable to you.
You will need to timely remove the excess (plus earnings) before the tax filing deadline. The deadline includes an automatic extension of six months, so the excess and earnings should be distributed by October 15th of the year following the year the contribution was made. If you remove the excess after you file your taxes, you will have to file an amended return. If you take this approach, the excess contribution is not taxable or subject to penalty when withdrawn. On the other hand, the earnings are taxable and could be hit with the 10% early withdrawal penalty if you are under age 59½. On the plus side, you will not have to worry about the annual 6% excise tax.
Correcting excess contributions can be complicated. You will want to seek the advice of a knowledgeable tax professional.