Taxes Can Be Hefty If You Make These Rollover Mistakes
This week's Slott Report Mailbag looks into taking RMDs from multiple accounts, 60-day rollovers and the once-per-year rollover rule. 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.
We met many years ago through the IAFP (now FPA).
My client turned 70 in January 2017 and wants to execute her first Solo 401(k) (Traditional) RMD this year. However, she rolled over the cash to her Traditional IRA, leaving only securities. We do not want to sell or distribute in-kind due to fees and portfolio management.
I know that in a solo 401(k), one must distribute from each account (vs. IRAs, where you can take the amount of all accounts from any/all/one account).
We could perform a 401(k) securities sale and cash distribution, or consider a dist-in-kind, but, instead, could she simply distribute the appropriate amount from her IRA (in addition to her first IRA RMD)?
I don’t know that there’s a regulation or that the service would care/know since the ‘nature’ would be satisfied.
When an RMD from one retirement plan can and cannot be satisfied with an RMD from another retirement plan is a complex area. It is very easy to go wrong. You are right that you can aggregate RMDs from IRAs and take the total amounts due from any account. However, unfortunately for your client, it is never possible to satisfy an RMD from a 401(k) with a distribution from an IRA, or even another 401(k). The RMD for each 401(k) must be satisfied with a distribution from that 401(k) plan.
You also must take the RMD from an employer plan before moving any funds out of the plan. An RMD cannot be rolled over and the first funds out of the plan are considered to be the RMD. If the rollover to the IRA happened this year, the client now has an excess contribution in the IRA in the amount of the 401(k) RMD. It must be removed, as a return of an excess contribution, by October 15, 2018, along with any net income attributable to the excess contribution. If it is not removed, then a 6% excess contribution penalty will apply for each year that it remains in the IRA. The excess contribution cannot be corrected by taking a normal distribution in the amount of the 401(k) RMD.
We can’t find any information on the following circumstances:
My husband has an IRA CD account at Bank #1, maturing 6/23/17
He also has an IRA CD account at Bank #2, maturing 6/29/17
Can he request both banks to close the CD’s and send him the funds? He would then turn around within the 60-day limit and put those funds into another IRA he already has established at another financial institution. Assume he makes the request to both banks on the same day. Is that considered one indirect transfer?
You will want to proceed with caution here! It sounds like your husband would have the funds be paid to him and his intention is then to deposit the funds back into an IRA within 60-days. This would be a 60-day rollover and rollovers are subject to the once-per-year rule. That rule says that you can roll over only one distribution from any of your IRAs within a 365-day period. Even if both distributions are made on the same day, they are coming from two different IRAs and are, therefore, considered to be two distributions. Only one can be rolled over. The fact that his intention is to rollover both to the same IRA would not change this. The distribution that is not eligible for rollover would end up being taxable for the year.
Your husband should consider doing trustee-to-trustee transfers instead. With a transfer, the funds would move directly from one IRA to another. There are no limits on the number of transfers that can be done in a one-year period.
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