Avoiding RMD's with 401K after age 70 1/2

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Avoiding RMD's with 401K after age 70 1/2

Postby tms » Tue Jul 02, 2013 11:21 am

A person turns 70 1/2 this year, is employed and is participating in a 401K. This person also has an old 403B from a former employer.

He will need to take an RMD from the 403B for 2013.

But the question is, if he rolls the 403B into the 401K after taking the RMD, and assuming he continues working, can he avoid the RMD for 2014?

In other words, does the fact that he already reached age 70 1/2 prevent him from avoiding the RMD by rolling into a 401k?

Any help would be appreciated. Thank you.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby ourbrooks » Tue Jul 02, 2013 11:39 am

All 401K plans require RMDs starting at age 70 1/2. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#2.
This is true even if you are still employed and still contributing to the plan.

If a person has both a 403b plan and a 401k plan, they are required to calculate RMDs from both.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby tms » Tue Jul 02, 2013 11:57 am

ourbrooks wrote:This is true even if you are still employed and still contributing to the plan.


If you are participating in a 401K, more often than not, the plan documents say that RMD's are required at age 70 1/2, or after separation from service, whichever is later.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby Watty » Tue Jul 02, 2013 12:13 pm

Depending on the amounts and if he is not already maxing out the 401K then another option is to just increase the payroll deductions to offset the RMD.

For example if the RMD is $12,000 then he could use the RMD to live on then have an additional $1,000 a month withheld from his paycheck each month. This would net out to zero for most of the tax calculations.

There lots of pitfalls with using retirment acconts for estate planning and he could very well avoid paying taxes this year only to eventlly run into very high RMD's when he is 80 or 90 or have lots of estate taxes later. I might be good to get professional estate planning if there are large amounts involved.

Just like a broken clock is right twice a day there are very rare situations where carefully selected life insurance or annunities are actually worth while for high income people with high taxes. A fee only financial advisor who does not get paid a commission for selling him one of these could tell him if he is that once in a blue moon person where these actually make sense.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby robebibb » Tue Jul 02, 2013 12:18 pm

A RMD is not typically required for individuals employed at age 70.5 as long as they do not own 5% or greater of the company which sponsors the plan. It seems like rolling over IRA funds into the 401k could delay RMDs but I’m not certain about that.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby JW Nearly Retired » Tue Jul 02, 2013 12:33 pm

ourbrooks wrote:All 401K plans require RMDs starting at age 70 1/2. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#2.
This is true even if you are still employed and still contributing to the plan.

If a person has both a 403b plan and a 401k plan, they are required to calculate RMDs from both.

Not correct in my plan. If you are still working for the company no 401k RMD is required. Quoting from my 401k SPD for example:

"If you are no longer employed by the Company and have reached age 70-1/2, the IRS requires you to
begin receiving payments from your account. The payment of your Required Minimum Distribution will
be made at the end of the year in which you turn age 70-1/2 or the year in which you terminate
employment with the Company, whichever is later."

JW
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby tms » Tue Jul 02, 2013 12:33 pm

Watty wrote:Depending on the amounts and if he is not already maxing out the 401K then another option is to just increase the payroll deductions to offset the RMD..


This is an excellent idea.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby MN Finance » Tue Jul 02, 2013 12:37 pm

RMDs are generally not required if still employed, even part time, at 70.5+ (never seen one that was required, but still used the word "generally"). With the exception being more than 5% owner, as mentioned already. Assuming the plan allows for rollovers, moving the 403b into the 401k would also defer RMDs on those assets for future years (ie, 2013 has an RMD on the 403b but not in 2014 if rolled in prior to 12/31). If they leave employment the RMD starts that year, so if they retire any time in 2014, then it doesn't help. But if they work a few more years, it's clearly a good move. You wouldn't want to do this with an IRA that had a basis, however, because you lose that basis.

EDIT: if the 403b has grandfathered accumulations (pre 87) which are already deferred for RMD purposes to age 75, then that's lost by moving it to the 401k.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby tms » Tue Jul 02, 2013 12:52 pm

MN Finance wrote:RMDs are generally not required if still employed, even part time, at 70.5+ (never seen one that was required, but still used the word "generally"). With the exception being more than 5% owner, as mentioned already. Assuming the plan allows for rollovers, moving the 403b into the 401k would also defer RMDs on those assets for future years (ie, 2013 has an RMD on the 403b but not in 2014 if rolled in prior to 12/31). If they leave employment the RMD starts that year, so if they retire any time in 2014, then it doesn't help. But if they work a few more years, it's clearly a good move. You wouldn't want to do this with an IRA that had a basis, however, because you lose that basis.

EDIT: if the 403b has grandfathered accumulations (pre 87) which are already deferred for RMD purposes to age 75, then that's lost by moving it to the 401k.


Thank you!
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby wshang » Tue Oct 29, 2013 12:08 pm

robebibb wrote:A RMD is not typically required for individuals employed at age 70.5 as long as they do not own 5% or greater of the company which sponsors the plan. It seems like rolling over IRA funds into the 401k could delay RMDs but I’m not certain about that.

This actually seems like a possible excellent strategy under certain scenarios such as a senior physician slowly bowing out of a group practice with a 401k plan. If he retains less than 5% stock ownership after age 70.5, then he can defer RMD indefinitely. While the percent necessary to withdrawl from the RMD table rises with each year, this strategy prevents his large 401k from pushing him into a higher tax bracket.

Any potential pitfalls to this strategy?
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby Alan S. » Tue Oct 29, 2013 3:43 pm

One pitfall (and solution)is that the employee needs to verify that the plan allows RMDs to be deferred after 70.5. While the IRS rules allow RMD deferrals for non 5% owners until after retirement, a plan is allowed to require RMDs at 70.5 for everyone. This is fairly rare, but some plans require exactly that. However, there is a solution despite the plan RMD distribution because these RMDs are not statutory RMDs (IRS), they are just plan RMDs and as such they can be rolled over to another plan or IRA. An IRA rollover of a plan RMD would then subject those funds to IRA RMDs in the following year, but the IRA RMD would be much lower, perhaps only 4% or so of the plan RMD amount.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby letsgobobby » Sat Oct 04, 2014 10:33 pm

Alan S. wrote:One pitfall (and solution)is that the employee needs to verify that the plan allows RMDs to be deferred after 70.5. While the IRS rules allow RMD deferrals for non 5% owners until after retirement, a plan is allowed to require RMDs at 70.5 for everyone. This is fairly rare, but some plans require exactly that. However, there is a solution despite the plan RMD distribution because these RMDs are not statutory RMDs (IRS), they are just plan RMDs and as such they can be rolled over to another plan or IRA. An IRA rollover of a plan RMD would then subject those funds to IRA RMDs in the following year, but the IRA RMD would be much lower, perhaps only 4% or so of the plan RMD amount.

Taken to the extreme: a 71 year old physician works 1 day a month and participates in a 401k which does not require RMDs. He rolls all old 403b, 401a, governmental 457b, and 401k assets into the 401k. He does this for twenty years and then dies. Was he never required to take any RMDs from any of these accounts?
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby randomguy » Sat Oct 04, 2014 11:26 pm

wshang wrote:
robebibb wrote:A RMD is not typically required for individuals employed at age 70.5 as long as they do not own 5% or greater of the company which sponsors the plan. It seems like rolling over IRA funds into the 401k could delay RMDs but I’m not certain about that.

This actually seems like a possible excellent strategy under certain scenarios such as a senior physician slowly bowing out of a group practice with a 401k plan. If he retains less than 5% stock ownership after age 70.5, then he can defer RMD indefinitely. While the percent necessary to withdrawl from the RMD table rises with each year, this strategy prevents his large 401k from pushing him into a higher tax bracket.

Any potential pitfalls to this strategy?


Well eventually taxes will be paid. Lets say you do this from 70 to 90 and then you (or your spouse) lives to 100. Would you have been better off paying taxes along the way or paying the large RMDs starting at 90? Or lets say you both die at 85. Would your kids rather get the IRA or assets with stepped up cost basis? You end up having to make a ton of guesses (high med expenses might let you get the money out at a low rate. Your kids might be a higher tax bracket than you are when they inherit,....).

Of course if you expect your taxes to drop significantly (moving from CA to FL for example) it is a no brainer. If they are going to stay about the same, you have to evaluate what is best for you.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby letsgobobby » Sun Oct 05, 2014 12:12 am

randomguy wrote:
wshang wrote:
robebibb wrote:A RMD is not typically required for individuals employed at age 70.5 as long as they do not own 5% or greater of the company which sponsors the plan. It seems like rolling over IRA funds into the 401k could delay RMDs but I’m not certain about that.

This actually seems like a possible excellent strategy under certain scenarios such as a senior physician slowly bowing out of a group practice with a 401k plan. If he retains less than 5% stock ownership after age 70.5, then he can defer RMD indefinitely. While the percent necessary to withdrawl from the RMD table rises with each year, this strategy prevents his large 401k from pushing him into a higher tax bracket.

Any potential pitfalls to this strategy?


Well eventually taxes will be paid. Lets say you do this from 70 to 90 and then you (or your spouse) lives to 100. Would you have been better off paying taxes along the way or paying the large RMDs starting at 90? Or lets say you both die at 85. Would your kids rather get the IRA or assets with stepped up cost basis? You end up having to make a ton of guesses (high med expenses might let you get the money out at a low rate. Your kids might be a higher tax bracket than you are when they inherit,....).

Of course if you expect your taxes to drop significantly (moving from CA to FL for example) it is a no brainer. If they are going to stay about the same, you have to evaluate what is best for you.

In the scenario I outlined the employee might be living off long term capital gains harvested in the 15% bracket, and converts only up to the top of said 15% bracket. Heirs get stepped up basis on taxable assets, some stretch Roth IRAs, the rest in stretch traditional IRAs which have had no RMDs... ever.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby randomguy » Sun Oct 05, 2014 8:50 am

letsgobobby wrote:In the scenario I outlined the employee might be living off long term capital gains harvested in the 15% bracket, and converts only up to the top of said 15% bracket. Heirs get stepped up basis on taxable assets, some stretch Roth IRAs, the rest in stretch traditional IRAs which have had no RMDs... ever.


And as soon as you die, RMDs start (assuming the spouse is 70). They were just postponed. The question is does that leave you in a better situation than taking RMDs. For a worst case imagine you live to 90 and you spouse lives to 100. Towards the end the spouse will be talking huge chunks of money out as a single. They might end up 33% bracket instead of the 25% you would have been as a couple. Unless you are converting stuff to a ROTH at 0%, eventually taxes get paid. Figuring out what is better is hard. Would you kids rather receive 750k with stepped up cost basis or 1 million dollars in an IRA? Well if they are paying 40% tax on the IRA distributions, the taxable account might be more appealing. If they are paying 15%, the IRA might sound better.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby ResearchMed » Sun Oct 05, 2014 9:24 am

JW Nearly Retired wrote:
ourbrooks wrote:All 401K plans require RMDs starting at age 70 1/2. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions#2.
This is true even if you are still employed and still contributing to the plan.

If a person has both a 403b plan and a 401k plan, they are required to calculate RMDs from both.

Not correct in my plan. If you are still working for the company no 401k RMD is required. Quoting from my 401k SPD for example:

"If you are no longer employed by the Company and have reached age 70-1/2, the IRS requires you to
begin receiving payments from your account. The payment of your Required Minimum Distribution will
be made at the end of the year in which you turn age 70-1/2 or the year in which you terminate
employment with the Company, whichever is later."

JW


Our 403b plan is like this.

In fact, DH can *NOT* remove any money at all while he is fully employed, even if we'd want to start spending some of it on the long-overdue-finally-started [pre-]retirement travel.
It's going to keep growing (Fates and The Market allowing), and we can't touch any of it, except a tiny amount in an emergency.

"Nice problem", in a way, but if he keeps working (and he wants to), then... that pot keeps growing, with fewer years remaining that it will ever be needed to support us.
We've stopped adding to IRA's, and we're about to stop the Employee contribution to the 403b, and add that to the travel pot, too. (Employer contributions do not depend upon Employee contributions, so those continue.)

We never envisioned this "problem", to be sure.

Obviously, he does now take the RMD from much smaller pot of IRA monies. That now goes to travel, too, along with our SS benefits.
He returned from our first cruise (which he refused to try for years), and immediately hit the computer to search for more. We've got a nice year planned :happy

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Re: Avoiding RMD's with 401K after age 70 1/2

Postby dodecahedron » Sun Oct 05, 2014 9:42 am

randomguy wrote:
wshang wrote:
robebibb wrote:A RMD is not typically required for individuals employed at age 70.5 as long as they do not own 5% or greater of the company which sponsors the plan. It seems like rolling over IRA funds into the 401k could delay RMDs but I’m not certain about that.

This actually seems like a possible excellent strategy under certain scenarios such as a senior physician slowly bowing out of a group practice with a 401k plan. If he retains less than 5% stock ownership after age 70.5, then he can defer RMD indefinitely. While the percent necessary to withdrawl from the RMD table rises with each year, this strategy prevents his large 401k from pushing him into a higher tax bracket.

Any potential pitfalls to this strategy?


Well eventually taxes will be paid.


Not necessarily, if you designate a charity as the ultimate beneficiary of your retirement account. :-) Or heirs with very low taxable incomes.

More seriously, one of my possible tentative plans is to do something like this--work at least a little bit in a job I love indefinitely (as long as I am cognitively capable of contributing), so I don't have RMDs. I may opportunistically convert those assets to Roth in years when it seems advisable to do so (e.g., if I have large charitable contributions due to gifts of appreciated assets.) If and when I require long-term care, I would expect to have a lot of deductible medical expenses, so I am leaving instructions for the person handling my affairs in the event of my incapacity to use withdrawals from those taxable retirement funds to pay for my care.
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Re: Avoiding RMD's with 401K after age 70 1/2

Postby legio XX » Sun Oct 05, 2014 10:50 am

Hmmm. Never thought of rolling one of these accounts into another. Will have to look into it . . .

I have two of them, one 401K and one 403B. They are only about 15% of my retirement fund. The intention is to roll each one into my VG traditional IRA when I stop working for the respective institutions, just for simplicity. I'm already taking RMDs from the IRA.

Right now the IRA is set to pay out on December 31. I won't know that I have retired from an institution until Fall of the relevant year (i.e. assuming no teaching assignment for either the Spring or Fall semester within a calendar year) I can do the the rollover "paperwork" in September and take the RMD in December from the IRA.

Estate planning isn't a realistic consideration here; I'm after simplicity. Keeping these accounts active is a way to modestly increase the nest egg, including some matching funds, but I also want to get them into the VG account when that is no longer an option.

But the rollover from one into the other to avoid the RMD sounds like a plan too.

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Re: Avoiding RMD's with 401K after age 70 1/2

Postby Lynette » Sun Oct 05, 2014 12:31 pm

I rolled over the 401K from my previous employer into the current one many years ago. I'm nearly 71 and don't have to pay RMDs.
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