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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